Zillow real estate site reaps big rewards with IPO
Zillow sees a big return from Wall Street on Wednesday during the website's initial public offering. Despite a down US housing market, Zillow appears to have a bright future, according to investors.
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The Zestimate has drawn criticism from homeowners across the country who suddenly had the value of their homes — as well as what they bought it for — easily accessible by anyone with an Internet connection. Zillow calculates the figure by taking available data, most of it public, and entering it into a formula that takes into account hundreds of such details as how many bathrooms or bedrooms a home has or where it is located. The site also offers personalized mortgage rates and housing advice. The company has never made a profit, though it grew its revenue 74 percent in 2010, to $30.5 million.Skip to next paragraph
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Zillow makes money from advertising, by real estate professionals as well as mortgage companies and brands such as phone or insurance companies. Spencer Rascoff, Zillow's 35-year-old CEO, said the volatile housing market has actually helped the company grow its ad revenue. That's because it accelerated companies' migration to online advertising from higher-priced offline ads in newspapers and elsewhere.
In the first quarter of this year, Zillow's loss narrowed to $826,000 from $2.8 million in the same period a year earlier and revenue doubled to $11.3 million. The company reported a loss of $6.8 million last year.
Though investors are betting on yet-unprofitable companies such as Zillow, experts say the current fever for Web stocks is hardly the bubble of the late 1990s and early 2000s. There are far fewer companies going public, and the ones that do have been around longer and have established business models. That wasn't always the case in the '90s. Menlow said, back then, investors didn't even look at the companies they were snapping up, and only asked "how many shares can I get?". He noted that investors are being more careful these days.
Like LinkedIn, Groupon and Zynga, Zillow is reaping the benefits of being the first to the market, as far as IPOs go, in its niche. This, said Menlow, usually assures a big market share, even if the company's business model isn't all that unique and could be duplicated by a competitor. Internet IPOs are hitting the sweet spot for investors, Menlow said, adding that while he would like to differentiate between the companies, "I don't know if investors are willing to do that at this point."
Whether the company's business model warrants the billion-dollar valuation is another question.
"At this point investors feel they know better than the analysts," Menlow said.
Including a private stock sale of 275,000 shares, Zillow raised $74.7 million in the IPO. That the company offered relatively few shares is another likely reason for its strong market debut.
Also on Wednesday, SkullCandy Inc., the maker of trendy headphones for iPhones and other gadgets, also went public. The company priced its shares at $20. Wednesday afternoon, the stock was trading slightly higher at $20.12 after earlier hitting $23.40.