Zillow: Good News and Bad News

September 12, 2013, 09:03 am ET, BY Neal- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Zillow Inc (NASDAQ:Z) is the top real estate website in the United States. The website is a destination for over 61 million unique visitors each month. The company’s stock has tripled in 2013 and hit a record high of over $103 per share. Zillow announced a secondary offering recently, and the stock is now trading about 6% off the record highs, so is the stock a buy, sell or hold from here?

Many investors sold on the news of the additional shares being added to the float by the secondary. However, the following day Australian billionaire James Packer, saw the dip as a buying opportunity, and acquired a 9.4% stake in the company, becoming the second-biggest shareholder in the U.S. real-estate website. Packer must see Zillow maintaining its lead over rival Trulia Inc (NYSE:TRLA) and be confident that the U.S. housing market will remain strong.

Zillow’s secondary offering was for 5 million shares, which represented a dilution of approximately 14.5%. The secondary included 2.5 million shares offered by Zillow, and 2.5million shares offered by some existing shareholders, including co-founders Richard Barton and Lloyd Frink, and CEO Spencer Rascoff. The company said it intends to use the proceeds for general corporate purposes, including acquisitions or investments in technology and businesses that complement its existing operations. Zillow creates revenue by selling individual subscriptions to mortgage brokers, real estate agents, and brand advertisers.

The company is no stranger to making acquisitions. Zillow acquired HotPads.com, a map-based rental housing and real estate search engine, for $16 million in cash in 2012. Zillow was looking to expand in urban markets like New York City, so the acquisition of StreetEasy was the company’s latest target. StreetEasy has about 1.2 million monthly unique users, primarily residential real estate shoppers in the New York region. StreetEasy can help Zillow rapidly expand its presence in the largest U.S. market, and use its sales team to increase advertising and subscription revenue, as the company hopes to keep its lead over rival Trulia.

Zillow is trading over 100 times next year’s earnings, while its closest competitor Trulia TRLA, trades at a multiple of about 54. Not everyone is bullish on Zillow’s shares, as short interest represents 21.6% of the stock's total available float. Stock Traders Daily has Zillow rated strong long-term, and our live trading reports shows the stock close to a test of long-term resistance.   Regardless of the news, we trade on price, and if resistance holds Stock Traders Daily expect the stock to decline to support.  Review Support now if price decline matters.

Zillow needs to continue to do everything it can to strengthen its network to stay ahead of Trulia. The Company has been willing to sacrifice profits in an attempt to capture more subscriptions from real estate agents and mortgage-loan brokers.  In 2012, the company made $50 million more in revenue than its rival Trulia. Recent acquisitions could lead to even more traffic, which could interest more real estate agents, and create an even more solid revenue stream for the company.

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