ZipRealty – Challenging Times, But

We have discussed the online real estate industry and Zip Realty in 2007. Here we will take a look at Zip Realty’s recent situation, it performance and its options.

The online real estate industry has been hit by the slowdown in the US real estate industry and a credit crunch. ZipRealty, a full-service real estate site, registered revenues of $28 million in 3Q07, a meager 7% over 3Q06. It reported a net loss of $4.8 million. Currently, the stock is trading at $5.24 with a 52-week range of $4.41 – $7.98, and a market capitalization of only $122.5 million.

However, Zip Realty’s performance was much better than the industry as its closed transactions declined by just 5.2% in 3Q07 compared to the industry’s decline of 38% y-o-y and registered 30% growth in the number of Zip Agents. The management expects 2007 revenues to be between $97.5 – 102.5 million and in 2008 it expects revenues to grow by 12% – 18%.

Not a bad result considering the circumstances. But the market is expecting worse as the country is facing an impending recession, rising unemployment, reduced consumer confidence, lower wages and tightening of credit, which are all expected to cause a decline in new listings, transaction volume and sales.

Bad news. But.

Zip Realty has been working on lowering operating costs, improving services and increase its market share. The Company has been gaining market share steadily.

I see this as an opportunity for Zip Realty to consolidate its position in the market. Zip Realty could capitalize on this by acquiring Zillow, but the valuation expectations would not reconcile.

Zip Realty itself is a good acquisition target for newspaper companies like McClatchy, NYT, etc. who have seen real estate ad revenues dwindle. Another players who should be interested in acquiring Zip Realty is Yahoo.

Consider this.

Facebook’s estimated revenues for 2007 is $150 million and it is valued at $15 billion. Zip Realty has an established business model, an estimated $100 million in revenues and is addressing a $3 billion market, which is growing rapidly.

The stock has a market cap of $122.5 million and even if you pay a premium of 20%, you still end up paying $150 million or 1.5 times sales. That’s dirt cheap and don’t forget that the online real estate industry is expected to be 32.1% of overall real estate ads by 2010 from the current level of 17.7%.

The stock is hopelessly undervalued, and a perfect opportunity, especially for Yahoo, who should be stitching up its verticals. Waiting too long would lure Mr. Murdoch in!