A New Way to Play Housing's Recovery

02/26/2013 11:30 am EST


It’s not a builder or a real estate brokerage, but this technology company stands to profit handsomely from the housing recovery, writes Jason Cimpl of Top Stock Insights.

Trulia (TRLA) is a great stock to own if you’re a believer in the housing recovery, which we are. The company offers free housing data, and their large and continually refreshed database contains more than 112 million properties and 4.2 million active listings.

Though the housing recovery will help Trulia’s business, the company has a bigger trend in its favor: 89% of consumers now prefer to use online search for researching properties. In return for delivering this helpful service to consumers, the company receives money from advertisements and real estate agents looking to drum up business.

There are more than 2.8 million real estate agents in the US, spending a total of $24 billion per year on advertising. Of that, $12 billion is spent offline (newspaper, print, etc). So there is a huge opportunity to seize portions of that money as it moves from off line to online advertisements. Trulia sits smack in the middle of this opportunity.

The company increased its number of subscribers by 34%, to 22.7 million in the nine months ended September 2012. Moreover, the average monthly revenue per subscriber increased to $148 from $97 during the same period—significantly higher than the average revenue per subscriber of $47 in 2009.

Trulia also provides specialized GPS-based search applications for mobile devices. Mobile advertising is a huge and rapidly growing segment, and also one area of online advertising that Google (GOOG) does not do well. Google has reviews, maps, video, weather, search...but it doesn’t have a real estate research platform.

Trulia posted record revenues during the past nine months—$47.5 million, a 77% increase. Subscription revenue accounted for $31.6 million, up 111% compared to the previous year. The company is not yet profitable. Sales increased 76% during the third quarter, but Trulia remains $9.3 million in the hole.

Trulia is an investment based on a concept. And thus it comes with a high level of risk. However, management reported positive operating cash flows of $2.3 million during the past nine months—up 70%. This means that the company can finance its growth through existing business segments. So profitability isn’t immediately necessary.

Also, Trulia recorded a profitable EBITDA for the first time in the most recent third quarter, showing that net income should be positive soon. In fact, analysts believe 2013 will be their first profitable year, moving from a loss of 39 cents per share to a profit of 17 cents per share.
At this stage, Trulia and Zillow (Z) are the kings of a very large market. We wouldn’t be surprised to see Google make a bid for one of them soon. If that happened, both stocks would jump.

With a 2013 price-to-sales ratio of six, Trulia may have some major upside ahead of it. Though this ratio may seem high to some, we’re also expecting that Trulia will exceed those sales estimates by as much as $25 million. That alone could account for $150 million to $250 million in market cap, taking the stock up into the mid-$30s.

We think that the shares are slightly undervalued now, but are downright cheap, should the company exceed frighteningly low analyst expectations. Also, we're not too worried about positive EPS yet. Instead, we'll put a bigger focus on EBITDA and sales growth.

So we’ll aim high with our forecast—knowing that the stock can double in a short window—and expect that Trulia will deliver huge numbers in upcoming quarter and make its way toward $36.
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