Zillow (Z) Gets its 'Zestimate' Cut at Citron, Sees Single Digits Stock Price
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Shares of Zillow, Inc. (NASDAQ: Z) are under heavy pressure Tuesday after famous short selling website, Citron Research, issued a brutal report on the real-estate website calling into question its business model.
Citron calls the company's business model "ridiculous" and said it failed on all four of Cintron's investible Web 2.0 points: 1) A new and disruptive way to use internet technology to meet a real market need; 2) Exponential revenue growth driven by viral buzz, solidly founded on genuine customer loyalty; 3) Soaring revenues free of heavy expense models – not dependent on overhead-heavy sales department headcounts; 4) Revenue transparency throughout the complete business model.
The website said Zillow, "will inevitably be cut in half just like the previous online real estate companies whose valuation collapse Citron has accurately predicted over the years." In the past, Citron accurately predicted the collapse of Housevalues.com (now Market Leader (NASDAQ: LEDR)) and Realtor.com (NASDAQ: MOVE), down 80 percent and 60 percent, respectively.
Discussing valuation, Citron notes that at a $1.477 billion market cap, the trailing P/E is 296, Forward P/E is 142, Relative PE to SPX is 17.75x, Price to sales is 16.49. "These are true nosebleed valuations," Citron said. However, the story is not about valuation, Citron said - " It has all the ingredients of a terminal business story."
Citron highlighted massive insider selling, which they said was more their entire gross revenues since their IPO.
Zillow is a Web 1.0 business presenting itself as a Web 2.0 investment, the website claims. Citron said the company makes all its money off real estate agents by cold calling them, essentially the same business as it was in 2006. Looking at the last two quarterly gross revenues, compared to its Sales and Marketing expense, Citron said that Zillow is "buying revenues with an intense telesales effort." "Put in its simplest terms, they spent an additional $3.8 million on sales expense last quarter, and only generated $4.8 million in new revenues!"
Citron also noted that visitor growth is flagging and the key real-estate agent customers don't like them. The company's Zestimate is alienating customer, which have to explain to prospects and clients why Zillow's Zestimate is wrong.
One big red flag, according to Citron, is Zillow's refusal to report churn - the most telling metric in any subscription-based business. Another is the RentJuice acquisition. Zillow paid $40 million for company that had quarterly revenue of just $139K and a loss of $897K in the same quarter.
Citron concludes:
"Zillow is headed towards the severe multiple compression that you might call "a definitive Web 1.0 phenemenon" … that falling out of bed feeling that was exactly the same fate that hit MOVE and SOLD investors in the middle of the last decade.
For all of the above reasons, we look for teens in the next year, and single digits eventually for this company."
Shares of Zillow are down 4.6 percent.
Citron calls the company's business model "ridiculous" and said it failed on all four of Cintron's investible Web 2.0 points: 1) A new and disruptive way to use internet technology to meet a real market need; 2) Exponential revenue growth driven by viral buzz, solidly founded on genuine customer loyalty; 3) Soaring revenues free of heavy expense models – not dependent on overhead-heavy sales department headcounts; 4) Revenue transparency throughout the complete business model.
The website said Zillow, "will inevitably be cut in half just like the previous online real estate companies whose valuation collapse Citron has accurately predicted over the years." In the past, Citron accurately predicted the collapse of Housevalues.com (now Market Leader (NASDAQ: LEDR)) and Realtor.com (NASDAQ: MOVE), down 80 percent and 60 percent, respectively.
Discussing valuation, Citron notes that at a $1.477 billion market cap, the trailing P/E is 296, Forward P/E is 142, Relative PE to SPX is 17.75x, Price to sales is 16.49. "These are true nosebleed valuations," Citron said. However, the story is not about valuation, Citron said - " It has all the ingredients of a terminal business story."
Citron highlighted massive insider selling, which they said was more their entire gross revenues since their IPO.
Zillow is a Web 1.0 business presenting itself as a Web 2.0 investment, the website claims. Citron said the company makes all its money off real estate agents by cold calling them, essentially the same business as it was in 2006. Looking at the last two quarterly gross revenues, compared to its Sales and Marketing expense, Citron said that Zillow is "buying revenues with an intense telesales effort." "Put in its simplest terms, they spent an additional $3.8 million on sales expense last quarter, and only generated $4.8 million in new revenues!"
Citron also noted that visitor growth is flagging and the key real-estate agent customers don't like them. The company's Zestimate is alienating customer, which have to explain to prospects and clients why Zillow's Zestimate is wrong.
One big red flag, according to Citron, is Zillow's refusal to report churn - the most telling metric in any subscription-based business. Another is the RentJuice acquisition. Zillow paid $40 million for company that had quarterly revenue of just $139K and a loss of $897K in the same quarter.
Citron concludes:
"Zillow is headed towards the severe multiple compression that you might call "a definitive Web 1.0 phenemenon" … that falling out of bed feeling that was exactly the same fate that hit MOVE and SOLD investors in the middle of the last decade.
For all of the above reasons, we look for teens in the next year, and single digits eventually for this company."
Shares of Zillow are down 4.6 percent.
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