Zillow Inc (Z), Trulia Inc (TRLA) – The Housing Recovery: Two to Buy

The housing recovery seems to be in full swing; strong enough that there are whispers of an impending mini-bubble on the horizon. While there has been tremendous growth in housing over the past year, the risks of a downturn seem inflated. Motley Fool contributor Morgan Housel discusses this in more detail here, with the key points being that affordability is still relatively high, and between bank-owned properties being put up for sale at a slow rate, and homebuilders still ramping up new construction, there seems to be plenty of pent up demand that will be sustainable for years.

And this is creating some great opportunities for investors to profit, and in more ways than you’d think. Let’s take a look.

If you’re looking for a home, you’ll probably look here

Zillow Inc (NASDAQ:Z) has only been a public company for two years, and shares are up more than 140% in that time, and an incredible 206% YTD. While such a sharp run-up, on the surface, makes Zillow Inc (NASDAQ:Z) look like just another overvalued tech stock, let’s take a look closer at what makes Zillow Inc (NASDAQ:Z) appealing.

With a market cap of less than $3 billion, and TTM revenues of $116 million, there is a long runway of growth ahead, and plenty of room for shareholders to make money. As an added benefit, the company is already profitable, with $5.9 million in net income over the past twelve months. Compared to competitor Trulia Inc (NYSE:TRLA)’s $92 million in revenue and net loss of $7.7 million over the past 12 months, you can see why Zillow Inc (NASDAQ:Z) is a more attractive investment.

Zillow Inc (NASDAQ:Z), at over 55 million unique visitors per month, has nearly double the monthly traffic of Trulia Inc (NYSE:TRLA). And per Alexa, these visitors stay longer and visit 50% more pages on the website. This is a substantial advantage, as users that stay longer and visit more pages drive more revenue and more profits. The value of Zillow Inc (NASDAQ:Z)’s network effect should only grow stronger as housing demand accelerates, and it appears to have a strong head-start over Trulia Inc (NYSE:TRLA) that it’s building on. Earnings on August 6 will tell us even more, but the evidence is strong that Zillow’s is further separating itself from the competition. One word of warning about profitability: As of this writing, there are rumors that management is planning to spend aggressively on growth in the upcoming quarters. While this could have a short-term impact on profitability as the effects take time to lift the bottom-line, it will strengthen the long-term prospects. Additionally, it could create a nice buying opportunity if the market responds poorly.

Given time, Trulia Inc (NYSE:TRLA) could become the Pepsi to Zillow’s Coke. But with this market still in its infancy, the smart bet today is on the first mover. Let the market play out before expecting there to be two investments. Keep an eye on Trulia Inc (NYSE:TRLA), but it’s too early to project success for both companies.

Potential to build upon

Homebuilders like Meritage Homes Corp (NYSE:MTH) have taken investors on a ride this year, with at least six periods where the stock has gone up 10% or more in less than two weeks, only to match it with the same number of drops of 10% or more. But through all the volatility, shares are up more than 23% YTD, outperforming the S&P by a slim margin on the back of strong demand for new homes.