Zillow (NASDAQ:Z), one of the leading online real estate marketplace and database, is scheduled to announce its Q4 2013 results after market close on Wednesday (Feb 12). Is the stock a buy? Or is it wise to get out? . Here is our preview of its Q4 results and a review of the company's historical performance.
Topline growth is the management strategy
Topline growth has been the key strategy of the management at Zillow. The topline growth has always been valued by investors in a sector seeing immense competition with the likes of Trulia Inc. and Move Inc. So let’s look at the critical number of revenue growth over the last few quarters.
The company has been growing at a healthy rate with an average Y/Y growth rate of 80% over the last eight quarters. With all due credit to Spencer Rascoff and his team, let’s state a fact which is plain obvious. The growth rate, which is clearly on a decline, will continue to decline as the revenue base gets bigger and bigger with every passing quarter.
We now move on to the bottom line of the company. The company has been inconsistent in generating earnings, which seems to be a direct result of the current reinvestment activity underway at the firm.
|Q4 2011||Q1 2012||Q2 2012||Q3 2012||Q4 2012||Q1 2013||Q2 2013||Q3 2013|
|Adjusted EBITDA Margin||16.7%||23.9%||19.0%||23.9%||19.9%||13.1%||11.2%||7.7%|
|Net Income margin||4.6%||7.5%||4.8%||7.3%||1.6%||-9.6%||-21.8%||-2.2%|
The above chart shows a clear margin contraction which has occurred at the firm over the last few quarters. The Q4 EBITDA (earnings before interest, tax, depreciation and amortization) is expected to be close of 5% as per the revenue and EBITDA numbers from the Q3 earnings call. It corresponds to a Y/Y margin contraction of close to 15% and sequential contraction of 2.7%. The major cause of the margin compression has been the rapid growth in the sales and marketing expenses, which have outgrown revenues. The sales and marketing expenses making up 38% of revenue in Q4 2011 exceeded 58% of revenues in Q3 2013, which is a clear indicator of the competitive situation in the market. It isn’t surprising growth is highly valued at in this sector.
Let’s take a look at the company’s cash flow generation and cash position at the end of Q3 2013. This is one positive for the firm, having generated positive operating cash flows in each of the last 10 quarters. The company ended Q3 2013 with a healthy cash (cash, equivalents and investments) balance of $425 million, which is 2x the operating expenses of the last four quarters.
Let’s now take a look at the pre result valuation multiple of Zillow, which are displayed in the table below.
Zillow LTM Valuation Multiples
|Current Market Cap ($ in millions)||3,440.00|
|LTM Revenues ($ in millions)||173.53|
|LTM Earnings ($)||-0.42|
|Current Stock price ($)||87.51|
The current valuation of the company brings to our minds just one word: Insane. The company is insanely overvalued. Let’s make the scenario a bit clearer.
Zillow, over a history of 7 years, has highest annual earnings per share of 18 cents per share. Now even if we assume that the company will grow its earnings at an annual rate of 100% over the next 5 years from 2013-2017(Impossible, 2013 will be a loss year unless the company pulls off a miraculous Q4 EPS of 62 cents per share), the total earnings per share (based on current O/S shares) total to $11 per share (BTW we have chosen to forget that money has time value). Any rational investor wouldn’t want to pay $87 upfront for such an investment, oh wait we call that speculation. A casino at Vegas would seem a better investment (If Zillow at current valuations is an investment option, then casino wouldn’t be speculation).
We, at Amigobulls, would definitely stay away from Zillow stock. Regarding our thoughts on the upcoming Q4 earnings call and the post earnings movement, one fact remains clear as water: considering the post earnings price movement’s over the last few quarters, a miss on the growth front will see investors punish the stock, while a solid topline beat coupled with a strong guidance will see a run up in the stock price. While we will report the latest numbers post the earnings announcement, Zillow investment isn't a game the bulls at Amigo would want to play.
To see Zillow’s latest stock price movement, click here (NASDAQ:Z)