The "Trader" column in today's Barron's questons the valuation of Zillow on the basis of declining growth rates. Specifically it notes that the growth rate of market place revenues has slowed to 141% this past quarter from the previous year's rate of 271%. And the growth rate of Premier Agents has declined from 212% to a mere 74%. The fact is that the recent quarter surprised to the upside and resulted in nice runup -- much of it, I assume, on short covering. If, as the Barron's article seems to expect, the growth rates had replicated the year earlier results, instead of rising from 6.9 million to 16.6 million, marketplace revenues would have increased to 25.6 million. And if the enrollment of Premier Agents had replicated the year-earlier rate, instead of 18,616 agents, we would have had around 30,000. Then we would have seen some real short covering. Anyway, the article will no doubt bring in the shortsellers Monday, their appetites whetted by the Facebook fiasco. I expect to buy into this selloff cautiously.
And now all those who listened to the Barron's piece and shorted this, I'm happy to say, are underwater. Unfortunately, whoever planted it was undoubtedly able to exit profitably. But I guess not all of us were counting on consistent 271% growth.
Fact of the matter is that analysts do indeed pay close attention to the change in the rate of change, otherwise referred to as "the second derivative," and when it goes negative the advanced valuations of high-growth stocks usually pull in toward a more realistic long-term figure. 12-15x EPS anyone?
In my opinion, when a piece like the one in this week's Barrons appears, it has been planted with the intention of setting off a short raid. I don't intend to fight it - I sold virtualy all of my Z at the open this morning. However, my point is that the figures from last quarter cited by Barron's were the very ones which set off a rally in the stock -- because they were stronger than the analysts had predicted. You can't have it both ways. My second point was that if, as the author of the piece seems to expect, Zillow was able to maintain the ultrahigh rate of growth from its first year, it would soon be bigger than Google.