Tale of the taper. Amidst a Fed-tapering, rising interest/ mortgage rate backdrop, Trulia (the “Company”) also finds its growth rates tapering. Copycat risk is extremely high given the lack of a defensible, sustainable competitive advantage and a marginal competitive position as the #2 player in a capped market.
Given low barriers to entry and low switching costs, over the long-run, ARPUs will suffer. At the end of the day, it comes down to valuation. Looking at the big picture, the company is valued at $1.6 B despite generating only $6 MM of LTM EBITDA. TRLA’s current valuation bakes in an exuberant growth trajectory and high-risk CAGRs 5 and 10 years out. Not buying the hype. Sell.
INVESTMENT THESIS: Anything from a technological/ user interface standpoint can be easily replicated and reverse-engineered.
(1) “Copycat” risk is extremely high and TRLA possesses no defensible, sustainable competitive advantage over future new entrants and competitors.
Barriers to entry are extremely low and limited. Switching costs are also extremely low given price-sensitive, “no-loyalty” nature of the transient, “no-salary” real estate professional payer.
Over the long-run (3+ years), as copycats and price wars emerge, ARPU will suffer and significantly deteriorate from early-adoption levels.
A “sticky community” provides the only semi-sustainable barrier to long-run entry. “Communities” and traffic are fickle, trendy and can also be replicated (Friendster, MySpace vs. Facebook).
(2) Over the long-run (3+ years), given “copycat” and competition risk, subscription revenue is at serious risk and will eventually gravitate meaningfully downward. Despite early-adoption enthusiasm and exuberant ARPUs, price wars will emerge and extremely price-sensitive customers will drive ARPUs downward, potentially toward zero.
A “no-subscription” fee, ad-revenue-only competitor may emerge, driving ARPUs down.
A “Kayak-like,” web-crawling competitor that can consolidate across boundaries (i.e. Zillow, Trulia, Move.com, etc.) may emerge. A no-subscription necessary, ad-revenue-only model will threaten ARPUs.
Historical perspective on the evolution of internet models and pricing dynamics provides clues and insight. Examples: Internet Access (AOL, Earthlink, Netzero), Ecommerce (Amazon, Buy.com), Online Brokers (Schwab, Etrade, Scottrade). Pricing always suffers over the long-run.
(3) Competition is coming from all angles. Direct competition is fierce and comes from the likes of Zillow, the established, #1 market leader, Move.com and any future copycats and imitators.
The major portals (i.e. Yahoo Real Estate, MSN Real Estate), given their deep pockets, also represent significant threats. Potentially, a Google Real Estate business would be a category killer.
The major brokerage houses (i.e. ReMax, Century 21, etc.) also pose a threat. Significant “in-sourcing” risks exist as the brokerage houses may take things in-house. Substitute competitors (i.e. Craigslist) may be able to offer cheap product alternatives.
If a market opportunity exists, they will come.
(4) Market size is limited, uneven and cyclical. Upside is capped. Globally not applicable. Estimated market for real estate professionals ranges from 0.5-2 MM real estate agents in the U.S. Marketing expenditures are highly discretionary and macro-sensitive. The number of zip codes is also a limiting factor.
Total real estate marketing spend and existing home sales transactions are highly cyclical and fluctuate widely through the business cycle.
(5) Fed-tapering and a rising interest/ mortgage rate environment may cause the fragile housing recovery to stall. A rising interest rate environment may prevail for the next 3-6 years.
If the housing recovery stalls, marketing spend will plummet along with TRLA’s operating results.
TRLA’s subscription growth will stall and ARPUs will meaningfully contract.
(6) TRLA’s current valuation bakes in exuberant, early-adoption ARPUs and a steep, high-risk growth trajectory out far into the future. Big picture, the Company is valued at $1.6 B while currently only generating $6 MM in EBITDA. Growth has already been aggressively priced in.
Assuming a 5-year Fwd 2017E EV/ Sales multiple of 3x, a current EV valuation of $1.4 B implies sales of ~$470 MM in 2017. Sales of $470 MM implies a 5-year CAGR % of 47%.
Assuming a 10-year Fwd 2022E EV/ Sales multiple of 1.5x, a current EV valuation of $1.4 B implies sales of ~$942 MM in 2022. Sales of $942 MM implies a 10-year CAGR % of 30%.
To summarize, at a price of $47.48/ share, 5-year and 10-year revenue CAGR %s of 47% and 30%, respectively, have already been priced into the stock price.
Very aggressive revenue expectations. Any slight underperformance, and TRLA’s share price will suffer.
Assumptions - 5-year Revenue CAGR=30%; 5-year Fwd 2017E EV/ Sales= 3-3.5x.
Based on the above, fair value for TRLA is $28-32/ share. Valuation represents 33-41% downside from current share price of $47.48/ share. Probability= 50%.
SumZero is the world’s largest community of investment professionals working at hedge funds, mutual funds, and private equity funds. With over 8,500 pre-screened professionals collaborating on a fully-transparent platform, SumZero fosters the sharing of many thousands of proprietary investment reports every year and offers several ancillary services in support of that effort. These free services include capital introduction services, buyside career placement services, media placement, and more. SumZero’s membership base is represented by analysts and PMs at nearly all of the world’s largest and most prominent investment funds. Get more research from SumZero.