Zillow (NASDAQ:Z), the operator of online real estate marketplace Zillow.com, announced the acquisition of StreetEasy, a NY focused real estate portal, for $50 million on Aug 19. Following the announcement the zillow stock fell by 7% in a single day. The acquisition comes in the face of stiff competition from other real estate portals like Trulia (NASDAQ:TRLA).
This strategic acquisition will help get a foothold in one of the biggest real estate markets in the US, with the acquisition adding close to 1.2 million users from StreetEasy. However a look at the financials of Zillow tells us that the company may be taking a huge risk with this acquisition. How many times have we heard that it is good to perform consistently well in your current markets first before expanding to newer opportunities? One look at Zillow financials shows that they are not the best when it comes to consistent profits and cash flow generation. However with improving cash flows over the years this is an acquisition which could hold the company in good stead in the years to come. Markets also reacted negatively to this news and the stock price was down 11% in the last two trading sessions. It is interesting to note that the company also proposed a secondary public offering on Aug 19th. The company plans to issue 2.5 million new shares thereby resulting in dilution for the existing shareholders. And this dilution in stock coupled with the risky acquisition is what we believe as a reason for the market punishing the stock over the last two days.
To see Zillow's price movement check Zillow stock chart.
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