Trending: F5 decided to buy NGINX after coming within weeks of unveiling a competing cloud application-management product
Zillow’s stock is dropping today after a stock analyst questioned the company’s business model. Click on chart for interactive version.

Shares of Zillow are taking a beating today after a financial research firm questioned the Seattle online retailer’s business prospects. Citron Research said in its report that the “willowy story Zillow has been telling Wall Street is completely inconsistent with company’s underlying business metrics.”

Zillow CEO Spencer Rascoff

Zillow’s stock is down more than five percent, though it is still trading at more than double its July 2011 initial public offering price of $20 per share.

The report comes nearly a week after Zillow rival Trulia completed its initial public offering at $17 per share. Shares of Trulia are down slightly today, hovering around $22. Zillow now has a market value of $1.2 billion, while Trulia’s market value stands at $580 million.

Here’s more from the Citron report, which is titled: “It’s Not Just the Ridiculous Valuation – it’s the Ridiculous Business Model.” (Full report below).

It goes on to say that strong Internet companies have four critical factors, including disruptive ways to use technology to meet a market need; exponential revenue growth driven by “viral buzz;” soaring revenues free of heavy expense models; and revenue transparency throughout the entire business model:

The report then goes on to say:

Zillow has had an incredible run, doubling since January based on the hope it will become a Next Big Thing.

But Citron sees more than just shadows of doubt here – Zillow utterly fails each of the four points above. While management glibly talks the Web 2.0 game, Citron sees major red flags in every one of the four criteria above.

The report also points out recent insider sales at Zillow, and notes that the company “operates in a hotly competitive space without a sustainable advantage” and has a “business model that never worked.”

Citron thinks shareholders lulled into complacency by Zillow’s recent stock chart while failing to question its underlying business model will face devastating consequences. While Citron has hesitated to spotlight a battleground stock such as Zillow, Trulia’s frothy IPO reception 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.


Zillow is profitable, and its revenues are growing when compared to last year. During the second quarter revenues increased 75 percent to $27.8 million, while its net income fell to $1.3 million. Its average monthly user base grew to 33.5 million, up 61 percent from the previous year.

Zillow also just completed a secondary offering which raised $157 million, so clearly not everyone on Wall Street is a believer that the online real estate company is a flash in the pan.

That said, critics have circled around Zillow from its earliest days, including real estate professionals who discounted its “Zestimate” and stock analysts who believed the IPO was overpriced. But this is among the harshest critiques we’ve seen. We’ve asked Zillow to comment about the report, and we’ll update if we hear more. (UPDATE: Zillow declined to comment on the report).

Zillow Final Sept 25 2012

UPDATE: Zillow’s Spencer Rascoff appeared on Jim Cramer’s “Mad Money” earlier this week. Check out his remarks here:

Like what you're reading? Subscribe to GeekWire's free newsletters to catch every headline


Job Listings on GeekWork

Find more jobs on GeekWork. Employers, post a job here.