It was back in May of 2011, when LinkedIn (LNKD) had it’s IPO, one which saw the stock double on it’s first trading day. I still remember watching this interview of the CEO Jeff Weiner , and was impressed at what he had to say. Of course the talk turned from a hot stock, to a bubble immediately as folks turned their attention to so-called fundamentals. Just two days after the IPO, there was a line to borrow shares to short the stock. It seemed to be an easy bet, as euphoria tends to push stocks too high too fast. The stock faded slowly into the $70s, which is when the company announced a secondary offering that would nearly double the amount of shares outstanding. Couple that with the ending of a lock-up period, and you have a recipe for a pullback, and pullback it did. The stock traded down into the $50s , and continued to tread water to end 2011. In 2012 LinkedIn(LNKD) started to gain a bit of traction and closed at $76 on Feb 9th, 2012, which was the day we said the stock turned from garbage to growth stock, a bandwagon we have continued to ride, despite the same bloated fundamental arguments being given to us at each new high. So why am I talking about LinkedIn(LNKD) when this article is about Zillow(Z)? To see the future sometimes you need to look at the past. In building the bull case on Linked(LNKD) at $76 in Feb 2012, we looked at Salesforce.com(CRM), another supposedly bloated stock that continues to defy gravity even to this day. Now we are building our bull case on Zillow(Z) using those previous examples.
- Hot stock in a hot sector. Cloud computing and social media have, and continue to be, hot sectors while Salesforce.com(CRM) and LinkedIn(LNKD) continue to be hot stocks. Despite the rise in rates, Zillow(Z) continues to be a hot stock in a hot sector.
- Billion dollar valuations with million dollar revenues. Zillow(Z) reported $46.9 million in revenue for the last quarter, yet sports a $3.6 billion market cap. LinkedIn(LNKD) was in a similar position with only $121 million in revenues for its first reporting quarter in 2011, yet it’s market cap exceeded $5 billion. In 2010 Salesforce.com(CRM) reported revenue of $331 Million in revenue for its 3rd quarter yet had a market cap in excess of $5 billion. LinkedIn(LNKD) has grown its revenues 200% from that point, while Salesforce.com(CRM) doubled it in nearly 8 quarters. On it’s currenty trajectory, it would not be hard to project Zillow(Z) doubling revenues in the near term.
- Astronomical Price to Earnings ratios. Both LinkedIn(LNKD) and Salesforce.com(CRM) could be considered poster boys for the 1k P/E ratio club. Both continue to have high ratios, and eventually one would expect the ratios to come down to earth when the companies fully mature. Using Zillow(Z)’s last profit of .01, it enjoys a 9,562 P/E ratio, even meeting it’s quarter 4 EPS estimate of .04 puts the P/E ratio at 2,390. These are the type of ratios that have Bears smelling blood.
- High Short Interest. Linked(LNKD) enjoyed over 25% of it’s available trading shares being sold short back in 2011. Salesforce.com (CRM) has enjoyed over 10% of it’s shares being short over the past 3 years. Zillow(Z) currently has a 19% short interest, which is almost down half since December of 2012, but still a significant amount, especially with the 200%+ move the stock has had since the start of the year.
Those are some of the reasons I love Zillow(Z) here, even with the huge move it has had this year. Can this be a $150+ stock? Sure, why not. The recent secondary offering announced a few weeks back presented a great buying opportunity, and now the stock looks set to break over $100. Smart companies utilize times like these to finance growth, and Zillow(Z) has picked a great time to do so.
Folks continue to use bloated fundaments, insider sales, competition worries, and huge short interests to validate a bearish position. I take the opposite view and think this could continue to be the monster stock of 2013. Time will tell, but we currently hold September $105/$110 calls and may add or close our position at anytime.
Zillow(Z) was our text trade idea of the week and the $110 Calls we sent out are now up 200%, and will look even better when the stock breaks $100.