Zillow shares fall on negative research report

[September 26, 2012]  BOSTON (AP) -- Shares of Zillow Inc. fell on Tuesday after a stock commentary website published a critical report on the online real estate service, saying its business prospects are dim and do not justify the rise in the stock's price since Zillow's initial public offering last year.

THE SPARK: Citron Research issued a report saying that the "willowy story Zillow has been telling Wall Street is completely inconsistent with company's underlying business metrics."

Citron is a short seller's research firm that publishes reports online about companies. Short sellers earn money when a stock declines. In its report, Citron said the purpose of its article was "not to cause a sudden drop in the stock price. Rather, we just want to be on the same side of the counter as management, the people who know best -- we are net sellers of the stock."

THE BIG PICTURE: Seattle-based Zillow went public in July 2011, and gets its revenue from advertising and subscriptions from real estate agents. The website allows people to research home listings and neighborhoods, while helping real estate agents market their listings. The stock has been one of the best-performing Internet IPOs in recent years, with its shares more than doubling since their debut. The company had set an opening price of $20, and shares closed on Monday at $44.41. Its chief rival is Trulia Inc., a newly public company whose shares jumped sharply on their first day of trading last week.

ANALYSIS: Citron said that Zillow's "underlying fundamentals look worse than they did even seven years ago," when Citron said it first began following what was then a privately held company. Unlike other recently successful Internet IPOs, Citron concluded that Zillow "operates in a hotly competitive space without a sustainable advantage" and has a "business model that never worked." Real estate agents offer "very finite potential" for the company to increase its revenue, Citron said. The report also cited recent stock sales by company insiders, and attributed the moves to "limitation of the current business model and the uncertainty of the future."

"Investors really need to examine why they are paying such a nosebleed-high valuation for decelerating growth, especially in the face of the huge insider sales," the report said.

A disclaimer on its website said Citron does not guarantee that it is providing all available information.

A Zillow spokeswoman declined to comment on Citron's report.

Last month, Zillow said its net income fell about 19 percent in the second quarter, as acquisition-related costs and other expenses outpaced strong revenue gains. Zillow reported net income of $1.3 million, down from $1.6 million in the year-ago quarter.

SHARE ACTION: Shares of Zillow fell $2.64, or 5.9 percent, to $41.77 in afternoon trading. Earlier in the session, the stock fell as low as $40.56. Shares traded at a 52-week low of $21.22 in December, and traded as high as $46.86 last Thursday.

[Associated Press]

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