Trulia: A canary in the tech-IPO coal mine
By Kevin Kelleher, contributor
FORTUNE — Looking at Trulia’s performance since it went public last month, you’d almost think that the Facebook IPO debacle never happened. Trulia, a San Francisco-based company that provides online real-estate information, listed its stock on Nasdaq on Sept. 19. Last week, it closed 34% above its $17-a-share offering price.
Seems just like the good old days — before Facebook (FB) went public in May. In the third-biggest U.S. IPO ever, Facebook raised $16 billion before trading glitches and concerns about the company’s ability to make money from the mobile web sent the stock from its $38-a-share offering price to less than $18 a share. (The stock has since come back to a more respectable above-$20-a-share price.)
Trulia (TRLA) was the first IPO cut from the same Web 2.0 cloth as Facebook. Like Facebook, the company’s prospectus talked up a bold, idealistic vision (“redefining the home search experience for consumers”), drew on content created by millions of its users and delivered eye-candy data like crime maps on the web as well as mobile apps. But Trulia’s focus was more narrow than Facebook’s: it aims not to connect the whole world online, but to give homebuyers the “inside scoop” on neighborhoods, while allowing real estate professionals a new way to connect with them.
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In other words, Trulia’s debut was something of a canary in the tech-IPO coal mine after what some reckoned to be the worst performing big IPO in history. And for now, at least, it seems like the canary has flown back out of the coal mine singing a happy tune. Trulia has risen 8% in the past week, compared with a 7% decline for Facebook.
A closer look at Trulia suggests that the robust stock performance may not last. A year ago, I looked at data on the post-IPO performance of tech startups and found that most performed well in the first month or so but that many were below their offering price only six months later. Many of the biggest web IPOs of the past year or so fit that trend. RenRen (RENN), the so-called Facebook of China, trades at $3.96, or 75% below its $14 offering price. Groupon (GRPN), the group-buying fad of yesteryear, is 74% below its $20 offering price. Zynga (ZNGA), the casual-gaming pioneer, is down 75% from its $10 offering price.
These are the kinds of severe declines you expect to see when a stock market crashes, not when a technology industry is thriving and the financial markets are in a relative state of health. Trulia may well not see declines like Groupon’s or Zynga’s — both of which received a fair amount of hype before their IPOs — but it could be more like Pandora (P), which rose 9% on its first day but now trades 36% below its offering price.
Why would Trulia drift down after its very promising first few weeks as a public company? One answer is in the company’s income statement. The company has lost an aggregate $23.4 million at the operating level over the past three and a half years. And the losses have grown steadily since 2009.
In 2011, the company’s revenue rose 95% to $38.5 million, while operating costs grew 88% to $44.3 million. Which suggested that, given enough years, the company could find its way into black ink. But in the first half of 2012, revenue grew 78% to $29 million, while operating costs expanded 90% to $35.8 million. Which means that, so far this year money going out of Trulia is starting to outpace money coming in.
Trulia could benefit from a slow but steady recovery in the U.S. housing market. More homebuyers mean more competition among real-estate professionals. And Trulia is becoming more dependent on those professionals. More than two-thirds of Trulia’s revenue come from real-estate professionals, up from 32% in 2009. The rest of its revenue comes primarily from advertising.
But Trulia is also facing competition for those subscriptions from companies like Zillow (Z) and Realtor.com (MOVE), both of which have a steady record of recent profits. Investors are willing to buy real-estate-data companies at premium valuations. Both Zillow and Realtor.com are outperforming the Nasdaq, although they have PE ratios of 340 and 67, respectively. But given a choice, they may prefer a company in this sector with profits.
But for now, the lift that Trulia’s stock is enjoying in the first few weeks after its IPO is signaling that other tech IPOs can enter the market. Next week could bring Shutterstock, an online stock-photo repository that filed for an IPO in May and is expected to raise $63 million. How warmly investors receive Shutterstock and other web startups hoping for an IPO will clarify further whether the Facebook IPO adversely affected the tech-IPO market.
One thing is clear. There has been a pattern in web IPOs for a few years now — to put it simply: rally now, drift down later — that doesn’t seem likely to change. Facebook’s IPO didn’t change that. And neither will Trulia’s.