Zip Realty has rallied strongly in the past few weeks, rising from a low of around $2.15 a share, all the way to $3.12 a share on strong volume. The reason it has increased in value so much has nothing to do with fundamentals, and thus provides a good entry point to reshort since the actual fundamentals have actually deteriorated.
Zip Realty received so much extra attention this week because one of its competitors, Zillow.com, went public and had a very strong opening. Based on this, ZIPR received a lot of attention and perhaps some investors thought ZIPR was cheap on a relative basis. They are wrong. While both companies lose money, there are still some major differences. Zillow has been growing revenue and site visits at a very quick rate over the last few years, having tripled revenue from 2008 to 2010 while ZIPR has seen flat to declining revenues and has been losing market share. Here is a graph showing the percent of traffic the top 10 online real estate websites in the United States capture each month. When a company drops off the top 10, it shows up in the graph as zero, so keep that in mind.
As you can see, in the last year ZIPR has dropped from 2.4% to less than 1.6% of the market. This means that we should not expect to see a reversal in ZIPR’s business anytime soon and that all the recent cost cutting they have done in the past 6 months may only balance out the declines in revenue. As well, this mitigates one of the big risks to this short trade, namely that ZIPR gets acquired by a competitor. If a competitor wanted to acquire ZIPR, the only logical reason would be for a land grab. ZIPR loses money, thus the only way a deal makes sense is to increase monthly page views at the aquiring company. With ZIPR grabbing a lower and lower share of the U.S. market in each passing month, a deal makes less and less sense. Based on these developments, I reshorted ZIPR at around $3.04 a share in the past 2 days.