On the surface, the answer is simple – who wouldn’t want to own all property portals in the US. However when you dig into the numbers, the answer is very different with the REA Group clearly being the preferred stock to own.
Firstly let’s look at market capitalisation.
The REA Group is currently valued at a whopping $4.1 billion. (Yes $4.1 billion) This compares very favourably to the market capitalisation of Zillow ($2.1bn), Trulia ($1.05bn) and Move.com ($0.45bn) who have combined value of $3.6 billion. We can safely assume that the combined value of all other US property portals would struggle to be significantly more than $0.5 billion.
So on the surface the REA Group is probably worth as much as all US portals combined.
Secondly let’s look behind the market capitalisation numbers at revenues and EBITDA. This is where things start to get a little scary for the US market.
The REA Group generated $311 million in revenue and $155 million in EBITDA in the calendar year 2012. Overall a 50% EBITDA margin. This gives a revenue multiple of 13x and an EBITDA multiple of 26x. Clearly these are very high indicating that the market still has strong expectations for future growth. Interestingly Google trades at 5.5x revenues and 21x EBITDA (CY 2012)
The US stocks compare unfavourably to the REA Group. As a whole, the top three players delivered $384 million in revenue but only $14 million in EBITDA.
- Zillow delivered $117 million in revenues in 2012 and an EBITDA of just $17 million. It is currently trading on a revenue multiple of 18x and an EBITDA multiple of 126x. The market clearly has very high expectations of what Zillow can do and it has a long way to go to just deliver on those expectations. If it were delivering an EBITDA at the same multiple as the REA Group, it would have delivered $81 million in EBITDA rather than $17m.
- Trulia delivered $69 million in revenues and had an EBITDA loss of $10 million. It is therefore trading 15x revenues. To have the same EBITDA multiple as the REA Group, Trulia would have delivered $40 million in EBITDA profit – a turnaround of $50 million. The market is probably valuing Trulia off of Zillow however there is clearly a requirement for management to deliver significant revenue growth while holding cost growth at almost zero.
- Move is a totally different beast. It trades at a paltry 2.3x revenue having delivered $199 million in income and only $7m in EBITDA. The reality for Move is that they have consistently failed to deliver revenue growth for the last decade. In fact revenues in 2008 were $242 million. The market seems to have lost interest in the stock.
The highly competitive nature of the US market, along with the need to operate freemium models, is clearly destroying value. These companies are investing significantly more in costs to deliver revenues than the market dominating REA Group. This is unlikely to change and Zillow (let alone the others) has a long way to go to deliver revenues at the same EBITDA margin as the REA Group.
In the Australian market, the REA Group is very well positioned to deliver continued strong EBITDA growth through either driving higher yields from its customer base or cutting costs. In fact, if it looked to its UK equivalent (Rightmove), its EBITDA margin could be as high as 70%.
Therefore unless there is some significant structural change in the US market (such as Zillow lead consolidation), it is unlikely that these excessive valuations can be sustained in the long term thus making owning the REA Group a more attractive option.
Simon Baker is the former CEO and MD of the REA Group. In 2000 he did the deal for News Corp to take at 42% stake in the REA Group. Between 2001 and 2008 he was responsible for turning the business around growing revenues from $4m to $155m, turning a $6m loss to a $35m profit, and growing market cap from $8m to a high of just under $1bn.
Today Simon invests in and provides strategic and operational advice and guidance to a range of property portals around the world. He can be contacted at [email protected]