Zillow boosts IPO price as investors bet on tech finesse
When shares of Zillow begin trading Wednesday, their fate will depend largely on whether traders view the Seattle-based company as an exciting...
Seattle Times business reporter
Founded: December 2004
Website launched: February 2006
Key people: Rich Barton, co-founder and chairman; Lloyd Frink, co-founder, vice chairman and president; Spencer Rascoff, CEO
2010 revenue: $30.5 million
2010 loss: $6.8 million
Shares sold: 3,462,000 to public, 274,999 to existing shareholders
Offer price: $20
Amount raised: $74.7 million (gross), $66.4 million (net)
Shares outstanding: 17.4 million Class A shares, plus 9.5 million Class B supervoting shares that are all held by Barton and Frink, guaranteeing them continued control of the company
Source: Company reports
When shares of Zillow begin trading Wednesday, their fate will depend largely on whether traders view the Seattle-based company as an exciting Internet pioneer or a hostage to the housing market.
Put another way: Does Zillow, whose database of more than 100 million U.S. homes attracts millions of visitors a month, resemble social-media company LinkedIn and Internet radio phenomenon Pandora, both of which had successful initial public offerings recently?
Or is Zillow more like HouseValues, a Bellevue-based provider of online real-estate data that went public in December 2004 and soared during the housing boom but was slammed by the bust?
Early indications are that, at least for now, investors are betting on the tech side of Zillow, the first e-commerce IPO for a Washington-based company since HouseValues.
Zillow far exceeded expectations Tuesday when it priced its initial public offering at $20 a share — well above the $12-to-$14 original estimated range and the $16-to-$18 range announced last week.
Along with a concurrent $5.5 million private placement to two venture-capital firms that already own shares, Zillow will gross $74.7 million from the deal, or about $66.4 million after fees and expenses.
It could take in an additional $10.4 million if the underwriters, led by Citigroup, fully exercise their option to buy up to 519,300 additional shares.
The higher-than-estimated price means Zillow will begin its life as a publicly traded company with a market value of $538.2 million.
The company has built substantial brand awareness since launching its zillow.com website in February 2006. It says some 22 million "unique users" used its site or mobile applications in May to get estimates of their home's value ("Zestimates" in Zillow-speak) or to conduct other real-estate research.
Those users don't pay anything. Instead, Zillow gets subscription and advertising revenue from real-estate agents, mortgage lenders and others. So far, though, that hasn't come close to covering expenses, much less generating profits.
Despite a 74.2 percent revenue increase last year compared with 2009, Zillow lost $6.8 million; it lost $826,000 in the first quarter of this year on revenue of $11.3 million.
However, the gap between revenue and expenses has been steadily narrowing.
Before the IPO, early backers had plowed more than $98 million into Zillow.
Zillow hopes to follow the path of companies such as Amazon and Expedia, which employed the power of the Internet to shake up traditional service businesses, ride out early-stage losses and eventually earn profits. Several of its founders and top executives, including Executive Chairman Rich Barton, helped start Expedia.
However, given the company's dependence on advertising from the real-estate industry, much of Zillow's future growth depends on the revival of the torpid U.S. housing market. And that's not likely to happen anytime soon.
The latest evidence came in the form of June data on housing permits and starts. While single-family starts were up 9.4 percent, single-family permits, a key gauge of future activity, rose just 0.2 percent to a 407,000 annual rate — the 13th-lowest rate since the data began to be collected in 1960, according to Patrick Newport, an economist with IHS Global Insight.
"The single-family market has been basically stuck at the bottom for more than two years, and there's no sign that things are going to improve anytime soon," he said.
While Newport said he believes there is pent-up demand, it's not likely to result in a notably stronger housing market until house prices bottom out and unemployment falls. That, he said, means a significant housing recovery may not happen until late next year or early 2013.
Zillow and its investors don't have to look far for a cautionary tale.
When HouseValues went public in 2004, it, too, offered free home-value estimates and listings, though users typically had to go through agents. After going public at $15, HouseValues stock briefly approached $20 but mostly hovered around its IPO price until early 2006, when it warned of a slowing housing market; it later went through several rounds of downsizing.
That company — since renamed Market Leader and now focused on selling software to real-estate agents and brokerages — hasn't had a profitable quarter since mid-2006. Its stock closed Tuesday at $2.22.
No matter how Zillow fares, it's certain to achieve one distinction: It will be the only Nasdaq-listed company with a single-letter ticker symbol (Z). All the others are listed on the New York Stock Exchange.
Drew DeSilver: 206-464-3145 or email@example.com
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