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Zillow IPO sparks bubble worries, but here’s what the pundits are missing

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Team Zillow in NYC

Zillow started out its second day as a publicly-traded company with continued momentum as shares gained another four percent to $37. The company is now valued at $651 million — which means investors now value it more than RealNetworks, Blue Nile and Marchex.

Is Zillow’s initial public offering a watershed moment? Some journalists are treating it as such, using the online real estate company as an example of how the tech market is overheating.

There’s certainly evidence of that, and you can read more about it in these stories:

GigaOM: Zillow IPO gets warm welcome — but will it last? 

Barron’s: Zillow soars, but where does it go from here?

Reuters: Zillow blazes in market debut, skeptics abound

But here’s why some of the bubble chatter might be — excuse the pun — overinflated. Zillow — unlike the dot-coms that came before it — is a real company. It has real revenue. And it is in a huge market ripe for transformation.

And while news organizations — including GeekWire — have consistently pointed out that Zillow has not yet generated net income on a quarterly basis, the company is very close to doing so.

In fact, so close (it lost $827,000 during the second quarter), that when the company reports financial figures in early August for the first time as a public company I wouldn’t be surprised to see the company shift into the black.

I asked CEO Spencer Rascoff about the “P” word in an interview on Wednesday and he noted that the company has been cash-flow profitable and EBITDA profitable for three quarters. Net income might just be around the corner, though that milestone alone won’t get the company out of the woods.

As one Seattle entrepreneur told me yesterday, it will be more important to check the value of Zillow’s stock in six months after insiders can sell their shares.

Meanwhile, the bubble debate continues to rage. And while certain companies invariably won’t be able to meet the lofty expectations placed on them, including the possibility of Zillow, others will.

After all, David Magee at the International Business Times notes that “eight times more people use the Web today than in 2000.”

A growing percentage of those people now have broadband Internet connectivity (and smartphones) and there’s no denying that our lives are becoming increasingly digital. Companies will take advantage of that shift.

Zillow, for one, has benefited from this trend as real estate agents look for more effective ways to reach customers than traditional advertising.

“The housing downturn has helped accelerate the migration of real estate advertising budgets from offline to online, and Zillow has been an beneficiary of that migration,” Rascoff told GeekWire on Wednesday.

So, bubble or not, companies will march forward trying to take advantage of what amounts to a tectonic shift in how information is shared and processed.

Previously on GeekWire: Shares of Zillow skyrocket in debut

  • Skeptic

    Online advertising?  Since when is that a transformational model?  What happened to disintermediation?  To “changing the way people shop for and buy?” 

    • Skeptical but Realistic

      Early on they were going for disintermediation. But they discovered that the NAR was very well funded and very well connected politically and would eventually crush them. For example, in 2007, the NAR managed to have Zillow banned in Arizona and was moving to do so in other states. So Zillow changed strategy. They couldn’t beat the NAR and their high commissions, so they joined them and now hope to make a profit by grabbing a big chunk of the realtors’ advertising budgets. Had they stuck to their original plan, they would almost certainly no longer exist.

      • Skeptic

        I think you are correct in your analysis of what happened.  But if Expedia had cowered the first time the airlines or travel agencies screamed, neither it nor Zillow would be here today.  I’m not saying it’s not a business strategy, I am saying it’s not transformational in the way I expected. 

      • http://www.drewmeyersinsights.com drewmeyers

        Zillow was not banned in Arizona – please check your facts.

        • What needs checking?

          A little googling leads to press accounts of Zillow being served with a cease and desist letter in Arizona in 2007 (http://mashable.com/2007/04/16/zillow-ban/). Is that the fact that needs to be checked? Many others also covered the story.

          John Cook subsequently reported that a bill was introduced in the Arizona legislature to allow Zillow to publish Zestimates (http://blog.seattlepi.com/venture/2007/04/23/arizona-legislator-rides-to-zillows-rescue/), but an update he later added to the story indicates that the bill did not pass.

          One way or another in seems to have gotten cleared up, but the original point about politically connected realtors coming after Zillow and convincing state regulators to go along is still spot on.

  • Mike Mathieu

    Every real estate professional that I know is looking for ways to get out of newspaper advertising and shift online. This is bad for local journalism, good for Craigslist, Google, Zillow et al.

  • Guest

    Read “The Snowball,” chapter 1, Sun Valley during the first dot-com boom. Warren Buffett gave a stunning speech where he declared that the rules of value investing hadn’t changed: companies still had to produce profits and generate shareholder value to merit investment from him and his company. At the time Buffett was dismissed and ridiculed as an out-of-touch old fogey who was stuck in an outdated era. Since then we’ve seen his pessimistic statements come true and value investors, such as myself, continue to abide by the simple rules that Warren recommends.

    For that reason I don’t see companies like Zillow as good investments. They trade on fashion, search engine placement, advertising rates, and all sorts of other measures that, while easily measured, are also extremely volatile. Who would have thought in 1999 that we wouldn’t be spending all our time on portals like Yahoo! and Excite, for example?

  • Cle206

    So John – how many shares have you purchased or have in your possession?

    • johnhcook

      To answer your question, none. I do not invest directly in technology companies. Most of my stock holdings are in mutual funds, and while some of them may hold technology companies, frankly, I don’t monitor their holdings closely at all. Thanks for reading.

      • Cle206

        Thanks for the response! Always interesting to see what those “in the know” own :)

  • Skeptic

    Why would you even pay for a listing, why not just place your ad on craigslist or bidfunshop

    • http://www.drewmeyersinsights.com drewmeyers

      Not all buyers look at craigslist. Sellers jobs is to reach as many buyers as possible, so they have to list/advertise where the buyers are looking.

  • http://www.duncanhaley.com John Haley

    I tend to fall more in the value camp myself, but the acceleration of their revenues (and thus rapidly decreasing losses) is impressive.  If the trend continues, they could be topside in a big way, quickly.  We are monitoring our managers to see what they end up doing with “Z” with great interest :).

  • Anonymous

    Never really thought about it like that before.

    http://www.net-privacy.us.tc

  • Hagrin

    Has anyone actually used just Zillow to buy a house?  I have and it’s totally useless compared to local online MLS listing sites. Zillow’s information is inaccurate, out-of-date, incomplete, etc. compared to local listing sites. I tried to use Zillow to buy my house recently and you just can’t use it to actually buy a house. 

  • The Digital Curmudgeon

    So, what the pundits are missing is that the web is growing a lot? No pundit worth his/her salt is missing that. There is almost certainly a bubble here and I wasn’t entirely convinced of that myself until this past week. 

    Look at what has happened in the past week. Zillow went public with no profits and $30M in revenue, but ended up with a ~$600M valuation. MyYearBook also had an exit, selling for $100M on $27M in revenue and $5M in profits. Zillow is growing revenue at about 100% year over year and MyYearBook is growing revenue at 53% but profit at over 300%. They both have advertising models although MYB makes money with virtual currency as well. So why is Zillow worth so much more? As a previous commenter pointed out, Zillow’s product kind of sucks. The only answers I can come up with are that Zillow has more hype and the public markets are starved for tech IPOs. That smells like a bubble.

  • http://profiles.google.com/jmkinfo66 Jon Kolsky

    Unfortunately Zillow lacks transparency, as Drew Meyer knows.on YouTube you can still check out a video of true claiming to be a Zillow employee. Bottom Zillow fools the public, uses doom and gloom tactics and other Shady antics to create false viewership and ratings. Zillow loses money, the first-quarter earnings proves that. The proof is in the pudding with their so called Zestimate and top contributors..