Expedia’s Mark Okerstrom and Zillow’s Chad Cohen are accustomed to fielding tough questions from Wall Street analysts.
But the chief financial officers were on a hot seat of a different sort last Wednesday as a group of accounting and business students at Seattle University presented their findings about both companies, sharing insights on everything from corporate governance to financial performance to accounting strategy. And yes, the students also bluntly pointed out some of the “red flags” that they encountered during their research, whether lawsuits facing Expedia or the tightly-controlled structure of Zillow.
The presentations were the culmination of a multi-week assignment in Seattle University professor Marinilka Barros Kimbro’s accounting course. The idea was to provide some real-world experience to students, getting them to present findings directly to execs of some of the biggest publicly-traded companies in the Pacific Northwest. Broken into eight teams, students earlier this month presented reports to executives from Blue Nile, Starbucks, Zumiez and Alaska Airlines. The presentations conclude Wednesday when Nordstrom vice president of finance James Howell and Cray CEO Peter Ungaro arrive on campus.
On the evening I stopped by, it was the turn for Expedia and Zillow.
The pressure was on as team members stood at the front of the classroom, with Okerstrom and Cohen in the front rows. Up first was Expedia.
The student-led team presented several interesting findings, encouraging the Bellevue online travel giant to bolster marketing efforts in Europe in the face of intense competition from Priceline.com/Booking.com. Expedia generates 45 percent of its revenue from international operations, and since most European workers get 25 to 30 working holidays, that represents a bigger opportunity to grow overseas, they reasoned. The students also found that the board of directors of Expedia skewed older (thanks in part to 71-year-old chairman Barry Diller) and male, with just one female board member. (Orbitz, by contrast, has three female board members).
The team suggested that Expedia add female directors and those with international experience in order to help fuel the expansion overseas. They also suggested that the stock is overvalued at its current pricing, and recommended a “hold.”
However, they did offer some thoughts on how to get the stock — one of the top tech performers in the past year — to higher levels.
“If Expedia takes our recommendations into account and they more aggressively expand in international markets, particularly China, and continue with new channels, mobile and other platforms, and if they strengthen their corporate governance, which could be a lot stronger, we think … that their revenue growth rate will grow and … with this valuation we see their stock price much higher, at $67.05,” said presenter Nicholas Uren.
Okerstrom got his chance to ask questions as well, wondering about how they analyzed the risk associated with tax lawsuits that Expedia is tied up in and how they figured operating margins.
In the Q&A portion, Seattle U team member Paul Ridenour also noted how tough it will be for Expedia to compete in airfares, especially as airlines bolster their e-commerce efforts.
“I don’t think that air will be a good revenue source for Expedia in a couple years,” he said. “I don’t think it should be ignored, and certainly there is a lot revenue there. But it is going to decline, the margins are going to get very small.”
The student team analyzing Zillow noted that the online real estate company could positively benefit from the changing winds in the real estate market, riding the effects of the recovery. (Something that already appears to be happening, with Zillow shares up 101 percent in the past three months). The students also spent a good portion of their allocated time discussing competition, including from longtime rival Trulia.
“Though Zillow and Trulia both have their own uniqueness … their products are really, really similar,” said team member Sherry Ren. “Those two companies are not only similar, they are moving toward the same direction.”
Given that the two companies are not that differentiated, Ren said that building a brand will matter. That’s something that Zillow agrees with, launching its first nationwide advertising campaign this year. In fact, Zillow CEO Spencer Rascoff last month noted that the company would spend heavily to build a “massive, enduring brand.”
Ren also pointed out some of Zillow’s other advantages — a bigger traffic base and higher average revenue per user than Trulia. “All of those advantages give Zillow the financial assets it needs to … build a brand that everyone recognizes,” she said.
In terms of “red flags,” Seattle U’s Anthony John pointed out that the board and top officers hold more than 80 percent of the vote. “I think the minority shareholder’s voice might get lost,” John said. Another potential issue: acquisitions. John noted that 73 percent of the purchase value of recent acquisitions has been in goodwill, making it hard to forecast earnings. “That being said, a lot of these companies that they’ve purchased have been trying to fill out …. the adjacent market space that they are moving in to,” he said.
In the best case scenario, the Seattle U team said that Zillow could climb to $55 per share (It nearly got there today, closing at $54.75). However, if traffic slows and real estate agents don’t renew with Zillow, they predicted that share price could drop to $32. Because of that, they recommended a “hold” on the stock.
“We are very optimistic about Zillow’s prospects, however seeing that the stock price has gone up so much since January, we’d recommend that the shareholders be conservative at this point,” said team member Tuomi Shen.