Trulia: A Broken Growth Thesis Is Quickly Taking Shape

Tale of the taper. Amidst a Fed-tapering, rising interest/ mortgage rate backdrop, Trulia (the "Company") also finds its growth rates tapering. Copycat risk is extremely high given the lack of a defensible, sustainable competitive advantage and a marginal competitive position as the #2 player in a capped market.

Given low barriers to entry and low switching costs, over the long-run, ARPUs will suffer. At the end of the day, it comes down to valuation. Looking at the big picture, the company is valued at $1.6 B despite generating only $6 MM of LTM EBITDA. TRLA's current valuation bakes in an exuberant growth trajectory and high-risk CAGRs 5 and 10 years out. Not buying the hype. Sell.

INVESTMENT THESIS:
(1) "Copycat" risk is extremely high and TRLA possesses no defensible, sustainable competitive advantage over future new entrants and competitors.
• Anything from a technological/ user interface standpoint can be easily replicated and reverse-engineered.
• Barriers to entry are extremely low and limited. Switching costs are also extremely low given price-sensitive, "no-loyalty" nature of the transient, "no-salary" real estate professional payer.
• Over the long-run (3+ years), as copycats and price wars emerge, ARPU will suffer and significantly deteriorate from early-adoption levels.
• A "sticky community" provides the only semi-sustainable barrier to long-run entry. "Communities" and traffic are fickle, trendy and can also be replicated (Friendster, MySpace vs. Facebook).

(2) Over the long-run (3+ years), given "copycat" and competition risk, subscription revenue is at serious risk and will eventually gravitate meaningfully downward.
• Despite early-adoption enthusiasm and exuberant ARPUs, price wars will emerge and extremely price-sensitive customers will drive ARPUs downward, potentially toward zero.
• A "no-subscription" fee, ad-revenue-only competitor may emerge, driving ARPUs down.
• A "Kayak-like," web-crawling competitor that can consolidate across boundaries (i.e. Zillow, Trulia, Move.com, etc.) may emerge. A no-subscription necessary, ad-revenue-only model will threaten ARPUs.
• Historical perspective on the evolution of internet models and pricing dynamics provides clues and insight. Examples: Internet Access (AOL, Earthlink, Netzero), Ecommerce (Amazon, Buy.com), Online Brokers (Schwab, Etrade, Scottrade). Pricing always suffers over the long-run.

(3) Competition is coming from all angles.
• Direct competition is fierce and comes from the likes of Zillow, the established, #1 market leader, Move.com and any future copycats and imitators.
• The major portals (i.e. Yahoo Real Estate, MSN Real Estate), given their deep pockets, also represent significant threats. Potentially, a Google Real Estate business would be a category killer.
• The major brokerage houses (i.e. ReMax, Century 21, etc.) also pose a threat. Significant "in-sourcing" risks exist as the brokerage houses may take things in-house. Substitute competitors (i.e. Craigslist) may be able to offer cheap product alternatives.
• If a market opportunity exists, they will come.

(4) Market size is limited, uneven and cyclical. Upside is capped. Globally not applicable.
• Estimated market for real estate professionals ranges from 0.5-2 MM real estate agents in the U.S. Marketing expenditures are highly discretionary and macro-sensitive. The number of zip codes is also a limiting factor.
• Total real estate marketing spend and existing home sales transactions are highly cyclical and fluctuate widely through the business cycle.

(5) Fed-tapering and a rising interest/ mortgage rate environment may cause the fragile housing recovery to stall.
• A rising interest rate environment may prevail for the next 3-6 years.
• If the housing recovery stalls, marketing spend will plummet along with TRLA's operating results.
• TRLA's subscription growth will stall and ARPUs will meaningfully contract.

(6) TRLA's current valuation bakes in exuberant, early-adoption ARPUs and a steep, high-risk growth trajectory out far into the future.
• Big picture, the Company is valued at $1.6 B while currently only generating $6 MM in EBITDA. Growth has already been aggressively priced in.
• Assuming a 5-year Fwd 2017E EV/ Sales multiple of 3x, a current EV valuation of $1.4 B implies sales of ~$470 MM in 2017. Sales of $470 MM implies a 5-year CAGR % of 47%.
• Assuming a 10-year Fwd 2022E EV/ Sales multiple of 1.5x, a current EV valuation of $1.4 B implies sales of ~$942 MM in 2022. Sales of $942 MM implies a 10-year CAGR % of 30%.
• To summarize, at a price of $47.48/ share, 5-year and 10-year revenue CAGR %s of 47% and 30%, respectively, have already been priced into the stock price.
• Very aggressive revenue expectations. Any slight underperformance, and TRLA's share price will suffer.

VALUATION:
Assumptions - 5-year Revenue CAGR=30%; 5-year Fwd 2017E EV/ Sales= 3-3.5x.
Based on the above, fair value for TRLA is $28-32/ share. Valuation represents 33-41% downside from current share price of $47.48/ share. Probability= 50%.