Investors who have one eye on real estate and the other eye on technology will be pondering how Wall Street responds to ZipRealty’s planned initial public offering, which is of particular interest in the wake of Google’s somewhat muddled IPO this week.
Google on Wednesday slashed its IPO in half and plans to sell 14.1 million shares priced at $85 to $95. The company and its investors originally planned to sell 25.7 million shares priced at $108 to $135. In its first few hours of trading today, the stock is up 18 percent to $102.95 a share.
Zip’s IPO shares haven’t been priced yet, but the online real estate brokerage company expects to raise as much as $69 million, according to the preliminary prospectus it filed July 12 with the Securities and Exchange Commission. Google’s IPO take will dwarf Zip’s, but perhaps the difference is only a matter of zeros.
Google’s IPO is an important indicator for Zip and other dot-com real estate companies because it will hint at investors’ appetites for IPO shares of technology-oriented companies. If Google fares well, its IPO could open the door for Zip and other technology companies to march forward with higher valuations. But if Google falters, its IPO could signal rough sailing ahead for other IPO-bound companies.
Google and Zip face an IPO market that hasn’t been all that receptive to new technology issues ever since the dot-com implosion brought it to a virtual standstill. More than 30 companies have postponed or canceled announced IPOs this year, while others have sold their first shares at lower prices than they’d originally anticipated, according to a Reuters report. The climate has been so unfavorable in recent weeks that 16 companies pulled out of planned IPOs this month, according to Thomson Financial. That’s the highest withdrawal rate since April 2001, and the month isn’t over yet.
Investors haven’t been enthusiastic about stocks overall, judging by recent market performance. One unfavorable indicator has been the Nasdaq Composite Index, which has trended downward from 2,100-plus territory in January 2004 to the 1,800-minus range this month.
Another hurdle for Zip is that real estate hasn’t been a darling of Wall Street. A notable exception to the dearth of publicly traded real estate companies was The DeWolfe Cos., a diversified real estate and financial company that was publicly held until NRT bought it two years ago for $5.7 million. History buffs may recall that NRT itself was slated to go public in 1999, but its IPO was postponed, then called off. Cendant later purchased the rest of the company from co-owner Apollo Management.
Other publicly traded companies that have real estate brokerage operations include Cendant Corp., Prudential Financial and Berkshire Hathaway, which owns HomeServices of America. Zip isn’t comparable to any of those companies in terms of either its business model or its size. Indeed, the closest comp to Zip looks to be online mortgage company E-Loan, which went public in 1999.
But is Zip just another staid real estate company or is it a sexy technology play? Zip as a technology company would be valued at the lofty price-earnings multiples of other technology companies. Zip as a real estate company would be valued at the much lower P/E multiples that DeWolfe in its day and Cendant now, for instance, command.
The answer might be somewhere between the two extremes: Yahoo trades at a sky-high price of more than 100 times earnings, and eBay trades at about 80 times earnings. Cendant and Prudential trade at P/E ratios below 15. Interactive Corp. clocks in with a P/E of about 60 while E-Loan’s P/E is about 40.
Zip, like E-Loan, and for that matter, Google, is a child of the Internet age. The company is self-described as a “full-service” residential real estate brokerage firm that “uses the Internet, proprietary technology and efficient business processes to provide home buyers and sellers with high-quality service and value.”
The brokerage has approximately 700 employees, of whom some 550 are licensed realty agents who sell homes in Atlanta, Baltimore/Washington D.C., Boston, Chicago, Dallas, Los Angeles, Orange County, Phoenix/Scottsdale, Sacramento, San Diego, the San Francisco Bay Area and Seattle. All of those markets have been open at least three years.
Zip founders Scott Kucirek, now EVP of new market development, and Juan Mini, no longer a Zip employee, started the company in 1999 with the idea that selling and buying homes could be faster, easier and more efficient. Venture capitalists Benchmark Capital, Vanguard Ventures, Barrington Partners, Pyramid Technology Ventures and Venture Strategy Partners invested million of dollars in Zip during the dot-com boom. CEO Eric Danziger, an experienced hotel sector executive, joined the company in April 2002.
In the first quarter of this year, Zip posted net revenue of $10.9 million and a near break-even loss of $115,000. Revenues, net of home-buyer rebates and home-seller commission discounts, and net losses amounted to $4 million and $13.8 million in 2001, $17 million and $14.8 million in 2002, and $34 million and $4.6 million in 2003, respectively, according to Zip’s preliminary registration statement. Second-quarter results aren’t yet available.
For the record, Google generated revenue of $1.4 billion and earned a $143 million profit in the first half of 2004.
The Google IPO has been marred by procedural issues surrounding the unfamiliar auction format and a snafu over issued, but unregistered shares. The IPO also has generated a lot of enthusiasm, criticism and trash-talk in the media, as well as a Playboy magazine story for which Google’s founders unwisely granted an interview during the company’s pre-IPO quiet period.
Zip naturally hasn’t received nearly as much attention as Google, in part because its executives have kept mum during the quiet period in compliance with SEC regulations. On the other hand, a spread in Playboy probably wouldn’t hurt the realty brokerage’s prospects as a soon-to-be-public company.
Marcie Geffner is a real estate reporter in Los Angeles.
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