(Disclaimer: Move, Inc. is a client of Onboard Informatics, my employer. But I have spoken to no one there, nor anyone here who deals with Move, for this post. Everything here is my opinion, based on my own research into publicly available information.)
In what is an unusually long post for him, Dustin Luther laments the current state of Move’s stock:
When I started at Move in May ‘06, the stock (and my options) was priced at slightly above $6. Today, I see the stock end today at $0.89, making for a very sad looking chart and definitive proof that I know nothing about timing my employment options. I’m also not particularly good at reading financials, but I do know enough to know that having a market cap of $136M when you have $140M in total assets (down from over $200M in total assets from last year) is not a good thing. I’d think they’d be an obvious take-over target except my guess is that many suitors would view the contract with NAR as more of an impediment to growth than an asset.
Yes, MOVE is an excellent takeover target. And that contract with NAR is an asset (valued by MOVE itself at about $1.5m it seems, based on their Q3 2008 10-Q.) And I think that contact could end up being pure gold if it means exemption for Realtor.com from the various IDX and VOW rules.
But really, that would mean that Move’s shareholders have lost their nerve completely. And there’s no reason to panic, from what I can tell. In fact, I think this is an amazing opportunity to build up long positions on MOVE. (I am not a financial advisor, nor anyone competent to advise you on stocks, so uh… think of this post as being like a stock tip from your cabbie or something.)
Let me list my reasons.
1. As Dustin points out, when your market cap is $136m, and your cash is $114m… um, yeah, you’re undervalued by alot. In fact, the cash position is likely significantly better than $114m, as explained in the 10-Q, and is likely to be closer to $235m. (The reason has to do with auction-rate securities, failures in that market, etc. which I noted earlier this year.) But if you’re a shareholder of Move, you’d be an absolute moron to sell $235m for $136m, wouldn’t you? Even discounting the ARS by some amount because of the risk, with the entire might of the U.S. government focused on bailing out the finance industry, I can’t see $121m worth of ARS being valued at only $22m (which is what $136m – $114m represents).
2. The core business over at Move doesn’t seem that bad to me. I’m no CFA, but looking at their Q3 results… yeah… there have been declines, but I see nothing to warrant a doom & gloom scenario.
Revenues went from $63.3m in Q3 of 2007 to $61.2m in Q3 of 2008. it’s a loss, sure, but… not enough to warrant a drop from $2.50 a share range in Nov of 2007 to $0.94 today (when I just checked it). The market must be pricing in some sort of future risk, but I’m just not sure I see it.
The management’s report contains this gem:
These changing conditions resulted in fewer home purchases and forced many real estate professionals to reconsider their marketing spend. In 2006, we saw many customers begin to shift their dollars from conventional offline channels, such as newspapers and real estate guides, to the Internet. We saw many brokers move their spending online and many home builders increased their marketing spend to move existing inventory, even as they slowed their production and our business grew as a result. However, as the slow market continued into 2008, it has caused our rate of growth to decline. While the advertising spend by many of the large agents and brokers appears steady, some of the medium and smaller businesses and agents have reduced expenses to remain in business and this has caused our growth rate to continue to decline and we may continue to experience a decline in revenue as we move into 2009.
So the big players are holding steady on their ad spends on Realtor.com, while the small guys are struggling to stay afloat. This isn’t… shocking… but if it means losing about $2m per quarter for the next eight quarters… um… Move can deal with a $16m loss with their balance sheet. But when you get even deeper in the weeds you get this:
Real Estate Services revenue decreased $1.4 million, or 3%, to $54.5 million for the three months ended September 30, 2008, compared to $55.9 million for the three months ended September 30, 2007. The decrease in revenue was primarily generated by a decrease in our HomeBuilder.com ® business due to decreased Showcase Listings revenue and a decrease in our REALTOR.com ® business due to decreased Featured Products revenue primarily due to reduced purchasing by one large broker customer. These decreases were partially offset by an increase in our Top Producer ® product offerings. Real Estate Services revenue represented approximately 89% of total revenue for the three months ended September 30, 2008 compared to 88% of total revenue for the three months ended September 30, 2007.
So… the 3% decrease for Real Estate Services (which is where Realtor.com goes) is because of ONE customer? I wonder who that is. But that doesn’t strike me as a fatal flaw. And then Move goes and sees increases from Top Producer? In this economy?
Color me distinctly unimpressed with doomsayers.
3. Move continues to invest in their core business. The latest 10-Q is showing that they’ve spent $6.8m in product and web site development. For the year, they’ve spent $20.5m on product and web site development. I have to ask… who else is investing this kind of money into product and web development?
I seriously doubt that the RE 2.0 upstarts like Trulia and Zillow are spending $20m YTD on web development. And if they are, I’m willing to bet neither of those companies have $235m in cash in the bank.
The thing that would concern me is if because of the economy, Move decided to slash and burn investment into its platform. That would have serious reverberations down the line, at a time when the future of online real estate is still very much up in the air. But $20m is not slash and burn by any stretch of the imagination.
4. Their margins aren’t substantially affected. Check out this beauty:
Gross margin percentage decreased to 81% for the three months ended September 30, 2008 compared to 83% for the three months ended September 30, 2007. The decrease is due to a decrease in margins in both the Real Estate Services and Consumer Media segments resulting from decreased revenues and increased costs in the segments.
Yeah, you read that right: 81% gross margins. Those are some freakin’ sweet numbers.
Move could probably do more to cut some expenses, especially in Sales & Marketing, and in G&A (particularly the corporate overhead, which is unallocated to a business line). They represent respectively $19.6m and $11.7m.
5. Move still has the biggest war chest in the RE tech space:
We have generated positive operating cash flows in each of the last two years. We have stated our intention to invest in our products, our infrastructure, and in branding Move.com TM although we have not determined the actual amount of those future expenditures. We have no material financial commitments other than those under capital and operating lease agreements and distribution and marketing agreements and our operating agreement with the NAR. We believe that existing funds, cash generated from operations, and existing sources of debt financing are adequate to satisfy our working capital and capital expenditure requirements for the foreseeable future.
That seems right to me. As the 10-Q indicates, even while reporting significant losses, Move was generating positive cashflow from operations — to the tune of $12.3m YTD. Combine that with their $114 in short-term cash, $121 in auction-rate securities, and you’re looking at a formidable player somehow flying under the radar.
I figure the market has to get over its nerves re: housing market. But until it does, fact is, Move and its properties are performing pretty darn well, and getting punished simply because they are connected to real estate. And anything real estate is toxic right now to investors.
So I think I’m calling my broker and loading up on Move at $0.94 a share. A drop of $2m in YOY quarterly results should not drop a stock from around $2.50 a share to less than half that.
Relax, Dustin. :) And call your financial advisor.