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Zillow Inc (Z), Trulia Inc (TRLA): Finding Opportunity in the Real Estate Portal Biz

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The real estate search portal business is on fire, with rising U.S. property values fueling home buyer inquiries and greater amounts of transactions. According to the National Association of Realtors, consumers are increasingly using the internet in their research process, with 90% of buyers performing online searches. However, a rising percentage of the search activity is going to the mega portals, led by Zillow Inc (NASDAQ:Z) and Trulia Inc (NYSE:TRLA). Indeed, some of the major search companies have outsourced management of their real estate marketplaces, including Yahoo! Inc. (NASDAQ:YHOO) and AOL, Inc. (NYSE:AOL). So, how should an investor play the sector?

Zillow Inc (NASDAQ:Z)

Given consumers’ expectation of free home-listing data, the search companies have had to find other revenue streams, such as real estate-related display ads and broker marketing services. Profitability has been hard to come by for most participants, due to the high expenses of managing website administration and content creation, as well as the costs of marketing to the brokerage community. However, the sector’s winners have built popular, comprehensive websites with innovative features that can help buyers through the entire purchase process.

Founded in 2004, Zillow Inc (NASDAQ:Z) had a first-mover advantage and boasts the industry’s highest monthly website users, 34.5 million as of December 2012. It has data on 110 million homes, roughly 75% of all U.S. homes, as well as a trove of 100 million pictures that it receives from user-generated and third party sources. Zillow Inc (NASDAQ:Z) has also been innovative with its creation of Zestimates, which estimate the value of homes based on proprietary algorithms that use neighborhood, tax, and property-specific information.

In FY2012, Zillow Inc (NASDAQ:Z) reported strong financial results, with increases in revenues and adjusted operating income of 76.9% and 87.1%, respectively, versus the prior year. Its sales growth benefited from gains in overall real estate activity, with both its monthly website user and real estate professional subscriber totals jumping significantly during the period. In addition, Zillow Inc (NASDAQ:Z) increased its industry market share, as it became the exclusive provider of home listings for Yahoo! Inc. (NASDAQ:YHOO)’s Homes website portal.

Looking ahead, Zillow Inc (NASDAQ:Z) plans to continue building its brand recognition, partially through its dissemination of real estate market reports to media partners, which currently cover approximately 276 local markets. It has also been adding to its complementary product capabilities through the acquisition channel, including recent purchases of technology solution providers to the home rental and mortgage sectors. With two years of profitable results under its belt, Zillow will be hard to displace from the top spot.

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