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ZipRealty – Challenging Times, But

Posted on Friday, Jan 18th 2008

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!

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Also, unless if I am reading their balance sheet wrong, they have $80 mil in cash. I think when analyzing ZIPR as an acquisition candidate, that should be included in the analysis.

Ralph Witherell Friday, January 18, 2008 at 3:36 PM PT

One question I have about the potential buyers that you mention. Aren’t these companies going to be scared off of zipr because they won’t want to be operating a real estate agency network with human salespeople? It seems like these suitors would be interested in a web presence only business model. Maybe there are companies out there that would see zipr’s current model, utilizing human agents, as a good fit but I have a hard time seeing it with the companies mentioned.

Ralph Witherell Saturday, January 19, 2008 at 1:12 PM PT

Both your pints are well-taken.
The cash makes it even more under-valued.
On the web-only business model issue front, I think the internet companies need to become comfortable with hybrid business models in due course. I will comment more on this later.

Sramana Mitra Saturday, January 19, 2008 at 1:32 PM PT

I guess you’re recommending the management team, because Zip has NO PROFITS. Most supposed so-called full-service-but-reduced-cost-internet real estate companies are bleeding cash. In fact they were bleeding cash during the housing boom. Right now during a housing bust, I wouldn’t expect them to do any better. In fact, most are doing quite badly.

On the East Coast, Foxtons just went bankrupt and shut down all operations recently when they were unable to find any suitors for another round of financing to the tune of tens of millions of dollars. They had burned through maybe $50million dollars to try to earn less money per transaction than other non-internet brokerage companies. Guess no one wanted to provide more money for the camp fire.

We gave up on most unprofitable internet companies nearly a decade ago, when the internet stock bubble burst. This housing bust will shake out a lot of poorly thought through business plans in the real estate industry. Do you think ZipRealty has what it takes to become profitable?

I see no reason to own a company without profits and without any reasonable means of reaching profitability. I agree that ZipRealty is undervalued. If there were any reasonable hope of them ever reaching profitability than now would be a great to buy them. Right now would be the time to be buying any good realty company, since they are all undervalued. However, I would want to know that the company would become profitable at some point. As far as I know neither ZipRealty nor RedFin has ever shown profitability, nor do I foresee profitability on the horizon. And at the most basic calculus, what we are buying in a company are its profits. Zip doesn’t have any; never did. If they won’t be profitable, then there is no reason to own them, nor is there any reason for anyone else to. So to hope for an acquisition of a company without profits is like hoping to not get stuck with the hot potato.

I do think that the real estate industry is ripe for a metamorphosis. However, I have not yet seen a widespread or highly visible alternative model that can have staying power and sustainable profitability. I have some ideas, but you won’t read about them in a comment on a blog. Ideas for profitability in a $3B marketplace, where others have tried but not achieved, would be discussed in meeting for angel funds or possibly in a second round of financing. The financing for an internally profitable business model would be by definition totally unnecessary and would be considered to grow the model geographically. But internally in each geography the model would have to be profitable to be worth its’ salt. I can’t believe that we are still funding unprofitable internet companies without a plan to reach profitability, in any industry.

Realtosh Wednesday, January 30, 2008 at 5:29 AM PT

With $80 mil in investor cash in the bank, Zip seems to have 4 years to figure how to start making money (based on a cash burn rate near $5 mil a quarter). At the very least they need to be acquired by someone with deep pockets who’s willing to keep making payments to support their habit (of losing gobs of money).

Realtosh Wednesday, January 30, 2008 at 5:39 AM PT

Why mention Murdock, but overlook Diller. Zip would be a good target for IAC’s division, as they are already building out a brokerage business.

Realtosh Wednesday, January 30, 2008 at 5:50 AM PT