Merger Boosts Both Zillow and Trulia

04/02/2015 8:00 am EST


Traditional advertising in the real estate industry is rapidly losing market share to online channels. The share of broker spending on newspapers fell from 34% in 2011 to 12% in 2014, notes James Krapfel of Morningstar StockInvestor.

Zillow (Z) and Trulia (TRLA) rapidly disrupted the US real estate agent advertising market with consumer-focused innovation. At the same time, the companies intensely fought each other to win the category outright, with neither gaining a commanding lead.

We expect the recently closed merger between Zillow and Trulia to fully unlock their potential. Rapid consumer-friendly innovation and brand-building efforts have made Zillow and Trulia go-to sources for real estate information. The combined entity controls roughly 60% of real estate portal revenue.

Online advertising has expanded to around 30% market share, with the majority of that in search and the rest at individual agent and real estate brokerage Web sites and real estate portals.

The real estate advertising market is estimated at $27 billion in the US. Zillow and Trulia have primarily focused on the $7 billion–$8 billion spent annually by real estate agents to generate leads.

The companies are seeking to expand into the remainder of the advertising market, which includes mortgage providers and rental properties.

Overall, Zillow has built a powerful brand within the real estate industry and has done a tremendous job of growing Web site and mobile traffic.

Additionally, the firm has a cost advantage over other Internet portals and brokerage Web sites because its size allows it to spread marketing, technology, research, and administrative costs over a larger revenue base.

Zillow does face some challenges. There is an ever-present but low-probability risk that Zillow could lose a large number of listings without being able to replace them. The rapid rate of industry innovation also gives us pause, as there is a risk of a new company offering a superior customer experience.

After the merger with Trulia, we value Zillow at $123 per share. We forecast the combined company to experience rapid growth in both the number of agents advertising on its Web sites and the average revenue per agent, driven by a growing consumer audience, improved conversion ratios, and pricing increases.

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