Shares of Zillow (Z) plunged on Tuesday following a scathing report on the real estate service company by short-selling research firm Citron Research, who called Zillow’s business model “ridiculous” and said it expects its stock price to be cut in half.
The report, titled: “It’s Not Just the Ridiculous Valuation – it’s the Ridiculous Business Model”, argues that the Seattle-based company besides being dramatically overvalued — according to Citron, Zillow’s “underlying fundamentals look worse than they did even seven years ago” — is also a poor investment compared to other online real-estate information sites. Citron essentially says Zillow “operates in a hotly competitive space without a sustainable advantage” and has a “business model that never worked.” The report also notes that there has been a steady stream of insider sales.
“Citron thinks shareholders lulled into complacency by Zillow’s recent stock chart while failing to question its underlying business model will face devastating consequences,” the report says. “While Citron has hesitated to spotlight a battleground stock such as Zillow, Trulia’s frothy IPO reception [Trulia (TRLA) completed last week its initial public offering at $17. The shares are currently trading above $22] further encourages the investing public to get swept up in the speculative frenzy, ignoring the looming array of red flags swarming around Zillow. The unvarnished truth is that the willowy story Zillow has been telling Wall Street is a completely inconsistent with company’s underlying business metrics. Meanwhile corporate and insider actions reveal a completely different agenda.”
Another interesting and valid point in Citron’s research is Zillow’s valuation. The company’s net income fell about 19% in the second quarter. Net income came in at $1.3 million, down from $1.6 million y/y. Zillow, whose stock trades at a t12 P/E of 493x (yep, you read that right) estimated 2012 profits, or 58x expected fiscal 2013 results, spent $3.8 million on sales, while only generating $4.8 million in new revenues.
“Investors really need to examine why they are paying such a nosebleed-high valuation for decelerating growth, especially in the face of the huge insider sales,” the report said.
Citron ends its report saying it expect Zillow’s stock price to nosedive below the $20 level next year, and single digits eventually.
Currently, Zillow trades above $41 a share, giving the company a $1.2 billion valuation.
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