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Originally published Saturday, July 23, 2011 at 9:41 PM

Sunday Buzz

Zillow's valuation outruns comparable stocks; also, Bill the Butcher faces cash crunch

Zillow the stock may be running ahead of Zillow the company after its hot IPO this past week; also, fledgling Seattle-based chain Bill the Butcher, facing a cash crunch, has to rescind a major financing transaction.

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It didn't take long after Zillow's initial public offering last week for the Monday morning quarterbacking to begin.

Online investment forums such as Seeking Alpha were filled with critical commentary about the Seattle-based online provider of real-estate data, in which words like "bubble," "overvalued" and "you got to be nuts" were prominent.

And it looked late last week that investors were having second thoughts. Zillow's shares ended the week at $34.27, after jumping 79 percent the first day from its offering price of $20. (One wonders how the person who paid $60 per share right out of the gate Wednesday feels now.)

Indeed, there are plenty of signs Zillow the stock may be running ahead of Zillow the company. First, the basics: Despite tremendous brand recognition and a 17.3 million-strong user base, Zillow hasn't brought in that many advertising and subscription dollars. Trailing 12-month sales are just $36.4 million; per user, average revenue in the first quarter was 65.1 cents.

Its losses are narrowing, but the company still lost $826,000 in the first quarter and $6.8 million in 2010. Losses since inception total $79.5 million. (Second-quarter financials may provide more insight on Zillow's path to profitability.)

So how does Zillow stack up against other similar companies? While there aren't any directly comparable firms that disclose their financials, a few come close.

Consider first Zillow's enterprise value-to-sales (EV/sales) ratio. Enterprise value is basically a company's market capitalization, adjusted for debt owed and cash held; it gives an idea of how much it would cost a buyer to acquire sole ownership of a company's future cash flows.

Zillow's enterprise value, based on Friday's closing price of $34.27, is nearly $845 million — 23.21 times trailing 12-month sales. (Arguably it would be better to use profits or forecast future sales, but since Zillow has none of the former and there aren't any readily available estimates of the latter, we stuck with trailing sales to facilitate comparisons.)

For comparison, HomeAway, an online vacation-rental company that went public recently, has an EV/sales ratio of 16.91; unlike Zillow, it is profitable. Market Leader, the Kirkland-based company formerly known as HouseValues, was at 1.29; ZipRealty, an online real-estate brokerage, was at 0.36.

Zillow also lags behind other newly public Web companies in generating revenue from users (which each site measures in its own way). In the first quarter, online music company Pandora got $1.50 per "active user"; LinkedIn, the business-oriented social-networking site, got $1.25 per "unique visitor."

None of this is to say that Zillow is a mere soap bubble. The company has tapped into a real consumer demand since its website went live 5 ½ years ago, and one could argue that given the long real-estate slump it's been an achievement merely to stay in business.

But to have a long-term future, Zillow will have to show investors it can generate actual profits — ideally generated off multiple revenue streams.

Bill McAleer, managing director of Voyager Capital in Seattle and a longtime investor in tech stocks, points to Amazon — which withstood massive losses in its early years and has diversified far beyond its online-bookseller roots — and Apple as models.

"One of the challenges of technology is, how do you monetize beyond the first product?" McAleer said last week. "The majority of tech companies go through a down cycle because the first wave they're surfing crashes and they haven't figured out how to surf the next one."

For now, McAleer said, investors in Internet stocks such as Zillow are placing their bets based on factors such as revenue growth and size of user base. But "ultimately, people are going to want to see earnings growth from these companies."

— Drew DeSilver,

Big infusion eludes

Bill the Butcher

Bill the Butcher, a fledgling Seattle-based chain with big aspirations for its organic and natural meat shops, caught some early criticism for not disclosing enough about where the steaks and chops come from.

But right now the small public company's main issue is where the money will come from.

This past week, according to a regulatory filing, the company had to undo a major financing transaction and take back 6 million shares it had issued last month.

That unusual move is a serious setback for the unprofitable six-store operation, which ended its third quarter May 31 with only $40,000 in cash. Co-founder and CEO J'Amy Owens has said that "Bill the Butcher will be to meat what Starbucks is to coffee."

But its precarious finances resemble Tully's instead.

The private placement would have yielded Bill the Butcher $4.5 million at 80 cents per share, says Owens, calling its collapse "a very disappointing outcome."

She says the investment firm on the other side of the transaction fired its fund manager July 15 before the funding was concluded. "I don't think we're going to see it in the short term, because they need to regroup."

But she says the company has "several other offers the same size or larger, and we're entertaining those now."

Another deal is unlikely to be on equally good terms, however. Bill the Butcher's stock, which trades in the over-the-counter market as BILB, closed Friday at 40 cents, down 33 percent for the week and just half of its recent high of 80 cents in late June.

The company's half-dozen compact stores, from Redmond to Magnolia, are served by a Sodo commissary that prepares meat purchased from small farms around the region. Owens says additional stores are under construction in Wallingford and Edmonds (where neighborhood blog reports it's been promising to open since May).

But without new funding its future may be in jeopardy. In the latest quarter, Bill the Butcher lost $719,000 on sales of $496,000, and for the third period in a row, revenues dropped from the immediately preceding quarter.

Meanwhile, obligations are piling up, in part due to some short-term debt financing. Against current liabilities of $1.48 million at quarter's end, Bill the Butcher had current assets of $131,000 — a gap that widened 43 percent during the quarter.

In April, a company news release blamed slowing second-quarter sales on a shortage of cash to buy inventory, which it tied to "public reporting costs and expenses associated with the company's financing activities."

That's not as far-fetched as it may sound: For the latest nine months, Bill the Butcher reported $564,000 in investor and public-relations expenses; it spent only twice that amount on meat and other products.

Owens, a longtime retail consultant, insists two of the stores are doing "far in excess" of her $500,000-per-store annual sales target, and the others aren't too much below goal. She professes not to be worried about the money crunch at Bill the Butcher, which has raised $2.7 million in its two-year existence.

"We've been short on cash from day one," she says. Financing "is always a nail-biter."

— Rami Grunbaum

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