In the first part of the article, we looked at how the Australian and US real estate markets differed in both their focus (offices vs agents) and in their operations (buyers agents and MLS's vs none of either in Australia). In the second part of the article we looked at how the Australian and US property portal markets also differed in both market structure (one dominant player in Australia vs many in the US) and in how portals operated (a pay to list model in Australia vs a freemium model).
Trulia, Zillow and the REA Group are all valued at over a billion USD. However the underlying economics of the US businesses are different to the Australia one. In this article we look at whether the hope (and hype) built into the US stocks has the potential to be realised.
In this article we will also reference Rightmove, the market leader in the UK. They have similar fundamentals to the REA Group in Australia but operate at a much higher EBITDA margin.
When looking at these businesses from a financial perspective, we need to understand the fundamentals.
The REA Group generated just under USD 300m in revenues in the 12 months to 30 June 2013, a year on year revenue growth of just over 20%. The business is highly profitable and generated an EBITDA of around USD 150m or just over 50% of revenues. Each year these numbers have been growing demonstrating a strong underlying business.
Zillow generated USD 173m for the 12 month to end of September 2013. However, in generating this revenue, it lost USD 20m at the EBITDA level. Trulia was in a similar place generating USD 80m for the same period and also losing nearly USD 20m at the EBITDA level.
For another comparison, Rightmove, the leader in the UK, generated nearly USD 200m in revenue for the 12 months to end of June 2013 at a whopping 75% EBITDA margin.
The REA Group trades around USD 5 billion market cap, Rightmove at around USD 4 billion, Zillow is at USD 3 billion and Trulia just over USD 1 billion.
On a simple revenue multiple, Rightmove is trading at over 20 times revenue (yes revenue), while Trulia, Zillow and the REA Group all trade around 16 x times revenue. On an EBITDA multiple basis, Rightmove and the REA Group trade at around 30 x EBITDA (still expensive).
Clearly the underlying business performance is heavily swayed to those countries where there is a clear market leader, no MLS, and a pay to list business model in place. This also means that there is a lot of hope (and hype) in the prices of Zillow and Trulia.
Interestingly, Move.com (the oldest listed property portal stock in the US), has more revenue than Trulia and Zillow (around USD 200m), is slightly EBITDA profitable (around USD 6m) but trades at a market cap of only USD 600 million. This reflects the flat revenue growth for the last decade, the handcuffs placed on the business by the relationship with the NAR, and the chequered past of the business with a former CEO going to prison for fraud.
Can Zillow and Trulia Transform into the Rightmove and REA Group of the US?
While the market has a lot of belief in the Trulia and Zillow businesses, the reality is that it will be very hard for them to transform into large dominating businesses that the REA Group and Rightmove have become. The bottom line is that no matter how fast the revenue growth is for the US players, the cost side is likely to remain high making it hard to get to a large EBITDA margin. The areas that will put pressure on either the revenue or cost sides are the level of competition in the market, the underlying business model, and consumer marketing.
In the US the market competition is far higher and far stronger than in Australia and the UK. While the REA Group and Rightmove have operated with little competition for much of their life, the US is a different with many small (and large) well funded players. In addition, as we have seen, access to the core content (the listings) is very easy and therefore it is hard to build a long term sustainable proprietary asset.
The US business model is very challenging. The freemium model means that you are reliant on convincing agents to spend money to buy feature products that may or may not delivery significantly extra value over and above just being on the site for free. This means that you are continually dealing with churn - a number not reported by the US players but for the Australian and UK leaders would be close to zero.
In dealing with churn in the US, the costs of running the business will be higher as there is constant marketing required to the customer base to both retain the customers and to attract new ones. In addition you will need a large sales team to sign up the agents onto new deals. Finally, you will need to work hard to continue to demonstrate the value of what you are delivering so that the churn rate is as low as possible. All in all, a very expensive exercise.
In the US, all the players are competing for the eyeballs. They are either signing up distribution deals (like Zillow with Yahoo)n they are running TV ads, or they are buying clicks from google and co. Any which way you cut it, the marketing costs will always be higher than in Australia and the UK where marketing is ~10% of revenues not 30%+ as in the US.
Moving into Ancillary Businesses
While the REA Group and Rightmove can focus on the core business of extracting marketing dollars from the agents and developers, the US businesses are having to move into other segments to find growth options.
For example Trulia has recently purchased Market Leader in an effort to improve its overall offering and to build out other revenue streams. The problem with these types of businesses is that they need different skill sets to operate and often run at lower margins (say 20% EBITDA margin) than traditional advertising businesses.
Overall it will be tough for the US players to emulate the success of their Australian and UK counterparts. The reality is that there are just too many things stacked against them. The ways in which the markets operate are different, the portal market structure is different and the overall economics are different. While the equity markets are backing these businesses to be big businesses in the future, much of this appears to be based on hope (and hype) rather than cold rational economic fundamentals.
Jamie Packer recently bought a nearly 10% stake in Zillow at USD 100 per share. Today it is trading at $72 - nearly a 30% discount to his entry price just 3 months ago. While on the surface Australia may appear to be much smaller than the US opportunity, in reality, the upside for the REA Group is much rosier than for the US operators as there is nothing like being a monopoly provider of core services in any market.
The Property Portal Watch Conference is on again in New York on the 13th and 14th of January. This conference brings together the leaders of Property Portals from around the world to discuss the key issues facing their businesses. We already have attendees from businesses such as Immoscout24, Move.com and Foreclosure.com. Register before the 15th December and pay only US$349 for the 1.5 day conference.