At $20 Pricing, Zillow IPO Creates Another Valuation Hat Trick (Z)

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Zillow, Inc. (NASDAQ: Z) has managed to price its IPO even above a raised price target range.  The online real estate operator took the Web 2.0 model by only selling 3,462,000 shares of Class A common stock at a price of $20.00 per share after having already raised the target range to $16.00 to $18.00 per share.

Citi is the book-running manager in the syndicate; the senior co-manager is Allen & Company, and co-managers are listed as Pacific Crest Securities, ThinkEquity, and First Washington Corporation.  Zillow granted the underwriters a 30-day overallotment option to purchase up to an additional 519,300 shares of the Class A common stock.

The good news is that all of the shares of Class A common stock are being sold by Zillow in the IPO.  The bad news is that this is going to be a low float IPO that leaves control locked up in a split-class of A-shares and B-shares.  This also leaves some 85% of the voting power locked up and remaining outside of investor control.  Zillow will also complete a private placement of 274,999 shares of its Class A common stock at the same $20.00 per share price to certain existing investors.

We previously noted that revenues grew from $10.6 million in 2008, up to $17.5 million in 2009, up to $30.5 million in 2010. During those years, its unique users grew from 5.518 million to 7.611 million to 12.666 million.  Venture capital backers include Benchmark Capital, Technology Crossover Ventures, and PAR Investment.

Investors need to understand that this is roughly a 50% premium to what the original target was.  As far as the roughly $70 million raised, the value is an implied amount of roughly $540 million.

Zillow was highlighted in this last weekend’s print version of Barron’s with the cautious notes and caveat of “Zillow needs to find more and better ways to monetize its database.  Pass for now.” Much of the other press has been positive and we will not be too shocked if and when the IPO trades at an even higher premium out of the chute.  Our concerns remain in place, and this is not exactly the sort of share structure we prefer to see for investors after the IPO has been completed.

JON C. OGG

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