Gut-Check Time for Homestore.com


By Amey Stone As the king of online real estate, Homestore.com (HOMS) has a long list of bragging rights: most visitors (by far), the most homes listed, and the most meaningful partnerships, including tie-ins with the National Association of Realtors (NAR), the largest realtor trade group, and America Online. The company's success is reflected in its stock price: At $30 a share, it has risen 50% since January while other dot-coms have struggled mightily. So has this stock topped out? Maybe not.

When operations broke into the black last fall, the company emerged as one of the few dot-com names that gave analysts something to feel good about. Calling it, "One of the best defensive names in the Internet sector," Goldman Sachs added it to its recommended list on Mar. 6. Prudential Securities started coverage with a strong buy on Mar. 28. And W.R. Hambrecht came out Mar. 27 with a buy rating and $40 price target.

"In our sector they are without question the lead dog in terms of listings and technology development," says Jay Leupp, a real estate analyst with Robertson Stephens. "They're in the best position to develop an electronic transaction platform. Plus, they're cash-earnings positive and have a strong balance sheet."

"FULLY VALUED"? Now first-quarter earnings are due out after the market closes on Apr. 25, and it's gut-check time for Homestore.com. With the stock's sudden rise in recent weeks, it's already approaching the price targets of many analysts. Prudential, for example, initiated coverage with a target of $32. "It's pretty fully valued," says Darren Chervitz, director of research at Jacob Asset Management, which added the stock to its portfolios in January when it was in the high teens.

Because analysts expect it to have cash earnings per share of 45 cents this year, it can now be evaluated on a price-earnings basis, which gives it a heady forward price-to-earnings ratio of 67 (the Standard & Poor's 500's forward p-e is about 21). And if the dot-com meltdown has taught investors anything, it's that buying a stock just because it's doing well can leave you vulnerable. (Homestore traded as high as $122 a share in January, 2000).

The upcoming earnings report will be a major test. Analysts are looking for the company to break even on operations (excluding amortization of goodwill and some other noncash charges that go into reported earnings per share). Revenues are expected at $107 million, up 86% from the same quarter a year ago. Many analysts believe there is chance for "a mild upside surprise," as Leupp puts it.

KEY NUMBER. In a late March interview with BusinessWeek Online, CEO Stuart Wolff certainly wasn't worried. In the face of skepticism then, he said, "we'll see you in April when our earnings are out. We can't be any more confident." Derek Brown of W.R. Hambrecht, which has one of the higher price targets at $40 a share, insists, "we still expect another 25% move in the next 10 to 12 months."

Probably the most important number in the report will be advertising revenues, which made up 40% of Homestore's sales in 2000. Merrill Lynch analyst Henry Blodget bets advertising will be down 5% from the prior quarter -- not bad considering he estimates a 35% drop in online advertising revenues industrywide.

Growth in subscriptions from real estate professionals (up 4% from the prior quarter) will make up for ad weakness, predicts Blodget. The recurring nature of these subscriptions, which account for the bulk of Homestore's revenues, is a big reason why Wall Street is so bullish on the stock. Says Brown: "There's a great deal of visibility into the company's model, which is a fairly unique attribute, particularly among Internet companies and tech companies at this point."

CHANGE IS TOUGH. Long term, analysts point to Homestore's opportunity for strong growth if it can get realtors to move business processes to the Web and link up other parts of the food chain, such as mortgage lending, so the entire home-buying process could be done electronically. But the demise of many business-to-business companies shows how challenging that can be, and Chervitz says that's not part of his financial models. "To get people to change the way they do business, that is tough," he says.

The company's model has plenty of other risks worth noting. For one, the Antitrust Div. of the Justice Dept. requested information from Homestore a year ago, although few analysts expect the inquiry to amount to anything.

Still, the company is highly dependent on relationships with the real estate industry -- both a strength and potential weakness. It has benefited from exclusive agreements with many of the companies that maintain real estate listings, and John Giaimo, CEO of competitor homeseekers.com (HMSK), says some services are already pulling back on the exclusive nature of the agreements.

SORT-OF EARNINGS. Just this month Homestore.com may have irritated the NAR when it temporarily allowed its real estate listings to be used online by Bank of America (the NAR doesn't want financial firms to be able to act as realtors). Brown calls this "much ado about nothing." Homestore spokesman Gary Gerdemann declined to address the issue other than to say the NAR is "a very close partner."

Finally, like many dot-coms that need to prove their business model works, the company has been aggressive in its financial reporting. For example, for the fourth quarter it had highlighted 4 cents of "cash EPS" in the headline of its earnings release. By at least one measure, that was true. But based on generally accepted accounting principles, it turns out the company actually had a loss of 41 cents per share. Merrill Lynch has been critical of some of Homestore's accounting as it relates to the company's use of stock warrants in many of its deals with partners.

Clearly, battered Internet investors have reason to be cautious before moving into Homestore. But it doesn't take away from the company's rare ability to weather the dot-com storm. "In this kind of environment, the fact that they've been able to execute on what they laid out is impressive," says Chervitz. The trick will be to stay on that path. Stone is an associate editor of BusinessWeek Online and covers the markets in our daily Street Wise column.

Questions or comments? Join in the discussion at our Ask Amey Stone interactive forum


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