Zillow: A Real Estate Juggernaut

 | Apr 22, 2014 | 10:00 AM EDT
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Back on February 14, 2013, I was skeptical of Zillow (Z). At the time, the stock was up 47% in less than a quarter and I thought the good news was baked in. Boy, was I wrong. Since then, the stock is up 143% and its just $1.68 from its all-time high.

I decided to look back and try to figure out why I was so wrong. After this move to new highs, is the good news really baked in or can the shares continue to run?

The fireworks started a day early on July 3, 2013. The stock took off like a bottle rocket and ran into the August earnings announcement. After trading between $70 and $90 for a while the stock recently busted out and moved higher.

I think what moved the stock was a huge jump in traffic between May and July. On June 10, 2013, the company reported that May traffic was up 65% to 54.8 million unique visitors. May's figure was up 5% over April's traffic. On the first quarter conference call, management told investors it would increase its advertising spending in an effort to gain mindshare and improve traffic. Apparently the new ads did the trick.

When Zillow reported the second quarter on August 6, it missed the estimate by $0.19 due to increased ad spending. But revenue was up 68.7% to $46.9 million. Marketplace revenues grew 86% to $36.5 million. The heavy ad spending drove unique visitors to 61 million -- a record. In that quarter, Zillow also posted a record number of subscribers. Subscribers grew 71% year-over-year.

I think positive momentum going to into the spring housing market is driving Zillow higher. According to Alexa.com, Zillow's traffic has climbed all quarter. Traffic for Trulia.com is up all quarter, too.

For the March quarter (fiscal 2014), which will be reported on May 7, analysts are expecting $63 million in revenue, up 62%. It seems that investors are anticipating good news and taking the shares higher. For the full year, the Street thinks the company will grow revenues 49.17%. But that seems low. 

Historically, the company's unique visitors grow for the first three quarters of the year. Traffic drops in the fourth quarter because the housing market slows into the winter. If I'm right and the first quarter is off to a strong start this year, it could mean the first three quarter estimates are low. Analysts are expecting 62% revenue growth in the first quarter, 52.9% in the second quarter and 46.8% in the third quarter. There seems room to bump up quarter two and third quarter estimates, since last year Q2 grew 68.9% and Q3 grew 67%.

Zillow was able to take advantage last year of strong website traffic and convert it into revenue. I bet this year won't be any different. Traffic has been trending higher all quarter and that should push the stock through August. I think the Zillow juggernaut is intact.

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