Two Stocks, One Overvalued Industry Worthy of a Short: Trulia Inc (TRLA) and More

Shares of online real estate companies Trulia Inc (NYSE:TRLA) and Zillow Inc (NASDAQ:Z) traded considerably higher last week following strong earnings and a fury of short covering. Both companies saw explosive growth, which can not be denied, yet because of their valuations there is little value left in either these two stocks. While one company might become a good investment once its price is more attractive, the other looks to be a prime short candidate; but which one?

Both Trading Higher

Over the past week, shares of Trulia have increased by 42% and Zillow by 25%. It all started on Tuesday when Trulia reported earnings that missed on the bottom line and barely beat on the top line. The company’s guidance was better than expected and mobile/monthly visitors showed strong gains across the board. As a result, the market saw this mixed report as a positive and its stock traded considerably higher. Zillow, on the other hand, beat both top and bottom line expectations by large margins, increased guidance, and showed better growth/user interaction across the board.

Both Zillow and Trulia’s gains were less related to earnings and more related to short interest. Trulia has 18.2% of its float short as of Jan. 31 and Zillow had 41.1%. Therefore, I find it somewhat odd that Trulia traded higher on a weaker earnings report with less short interest. It seems logical that Zillow would have been the stock to rise more than 40%, and Trulia by 25%. With that being said, both stocks are overvalued, and although I think Zillow is the far better company, both are way too expensive.

Valuation

Both companies are seeing near equal growth, between 70% and 75% year-over-year. Zillow is the larger company, with revenue of more than $100 million compared to Trulia’s $70 million. Therefore, the fact that Trulia and Zillow have equal growth is also a reason for concern, regarding Trulia, as a smaller company should post better year-over-year returns under the same business model.

Zillow is also a profitable company, with net income of $6 million and operating cash flow of more than $30 million over the last 12 months. Trulia has posted a net loss of almost $6 million and has operating cash flow of just $3.77 million over the last year. Therefore, Zillow with its profit margin of 5%, is a much better and more efficient company that Trulia with its profit margin of (16%).