Today’s new idea is a unique play on a housing rebound from Small Cap Investor Pro Editor Tyler Laundon.
“Market Leader, Inc. (LEDR) is differentiated from most real estate plays because it’s going after the real estate professionals. It has built (and purchased through acquisitions) a technology platform that it sells as a subscription service to real estate agents and brokerage companies. The software, sold as software as a service (SaaS), helps these professionals generate new sales leads and (according to company reports) close more deals.
“The platform also includes a customer relationship management (CRM) tool as well as access to training and marketing programs/webinars, a social media outlet geared specifically to real estate professionals and a variety of other customer outreach and professional development tools. The goal is to build the industry’s first one-stop-shop for real estate professionals. ...
“The company offers different tiers of service depending on the customer — individual agents pay around $100 per month for a basic service, whereas a team of agents or brokers might pay ten times that for an enterprise-wide version. Clients typically also pay around $100 for advertising services to help generate new sales leads. All in, the average charge is for around $200-$300 per month. ...
“The company has been upgrading, purchasing and integrating new offerings since 2008 when it made the strategic shift to focus on the software and subscription model. Prior to this shift it had a lead generation model, which had been the company’s main revenue source since it was founded in 1999. ... After being founded in 1999 as HouseValues, it went public in 2004. It grew revenues from $1.6 million in 2000 to $85.8 million in 2006 and was profitable every year — an impressive start. But when the downturn hit the company realized the flaw in the lead gen only model (not very resilient) and shifted gears to focus on rebuilding the product as a subscription offering to suit real estate professionals. ...
“A wide subscriber base for Market Leader is the key to success. Individual agents are great, but to grow rapidly LEDR must penetrate the walls of the big real estate franchises and large brokerage companies. Doing so will result in wide-spread adoption far faster, and help to legitimize the product for potential customers who are on the fence. LEDR has attacked this opportunity, getting its foot in the door at two of the biggest firms out there. This is why it now has a customer list of over 100,000 whereas a few years ago it was a fraction of that number.
“The first franchise customer was Keller Williams Realty, the nation’s second-largest real estate franchise company. In Q2 2011, Market Leader delivered a version of its base product specifically for Keller Williams, which launched the product internally as ‘eEdge’. Keller Williams paid around $10 million for an initial five-year term for each of its 80,000 associates to have access to the base product.
“Both companies claim that Keller Williams’ associates are more productive and generate more commissions with the product. And LEDR states that more and more they are upgrading to the premium ‘Professional’ version. This is the key to the company’s up-sell strategy. LEDR announced premium sales to Keller Williams’ associates hit a $10 million annual run rate in the last quarter, and it’s now grown Keller Williams premium subscriptions every quarter for seven quarters. Market Leader appears to be building on the apparent success of this franchise strategy, announcing smaller deals with both Century 21 Real Estate (which has around 60,000 agents) and Better Homes and Gardens Real Estate in 2012. ...
Steady Improvement Trending Back Toward Break-Even
“With quarterly revenues having just eclipsed the $10 million mark in Q1 2012 for the first time since Q2 2008, LEDR looks to be recovering from the harsh trough in its revenues brought on by the real estate bust. As I’ve discussed however, this time around the revenues are different, coming mainly from subscriptions (versus lead generation). This should be a much stickier source of revenue. ... Acceleration in revenues is better seen by looking at the quarterly results in the chart below. Each quarter LEDR grows revenues sequentially, a good sign indeed. And since Q4 2011 the company’s net loss has been decreasing as well.
“The revenue trend is clearly good on a sequential basis. On a year-over-year basis, it’s even better, growing 30% in the last quarter and 34% over the last 9 months. Management has stated it expects revenue growth to continue on the same sequential trend, supported by growing demand from its franchise customers at Keller Williams and Century 21, the latter of which will show up for the first time in the upcoming Q4 results.
Valuation
“LEDR is trading near the low end of the range in its comparison group with a price-to-sales ratio (PS) of 4.5. By comparison, Zillow’s PS ratio is 11.3, Trulia’s is 11.3, Tree.Com’s is 3.1, Salesforce.com’s is 8.5 and inContact’s is 3. These companies serve as a good industry snapshot since they cover real estate and CRM solutions, include both profitable (Zillow and Tree.Com) as well as unprofitable comparisons and cover a wide range of market capitalizations.
“The average PS ratio from this group is 7.44. If we accept that as a reasonable target given LEDR’s growth profile, which I do, we can validate a 65% rise in the share price to almost $12.00 before it starts to look too stretched. I think it’s entirely reasonable that the stock will hit that price in 2013, provided that the next quarterly call shows LEDR’s continued ability to convert agents from franchise customers into premium subscribers. If it doesn’t, we’ll have to reevaluate the company’s prospects. ... The steady rise in LEDR’s share price indicates to me that there are institutional buyers behind this stock. I think they are there for a good reason and I’m looking forward to following this story as it develops.
“Action to take: Buy a first tranche of Market Leader (Nasdaq: LEDR) around $7.36.”
- Tyler Laundon, MBA, Small Cap Investor PRO, January 25, 2013