Why Zillow Is Poised to Pull Back

Based on the aggregated intelligence of 180,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, online real estate marketplace operator Zillow (NASDAQ: Z  ) has received a distressing two-star ranking.

With that in mind, let's take a closer look at Zillow and see what CAPS investors are saying about the stock right now.

Zillow facts

Headquarters (founded)	Seattle (2004)
Market Cap	$2.6 billion
Industry	Internet software and services
Trailing-12-Month Revenue	$133.0 million
Management	Co-Founder/Chairman Richard Barton CEO Spencer Rascoff
Trailing-12-Month Return on Equity	0.2%
Cash/Debt	$179.1 million / $0
Competitors	HomeGain.com Market Leader Zaio

Sources: S&P Capital IQ and Motley Fool CAPS.

On CAPS, 34% of the 517 members who have rated Zillow believe the stock will underperform the S&P 500 going forward.

Just last week, one of those Fools, All-Star JakilaTheHun, wroted that the Zillow bear case all boiled down to price:

Complete insane at nearly 20x revenues. Zillow is a rapidly growing firm and may have a bright future, but too many investors misunderstand the dynamics with the company. Zillow is not like LinkedIn (NYSE: LNKD  ) or Netflix (NASDAQ: NFLX  ) . LNKD and NFLX both have high operating leverage, which means that for every dollar of incremental revenue, a very large chunk of that goes to profit. Z is closer to the other end of the spectrum, as it has to spend a considerable amount of money to generate each incremental dollar of revenue.

Given the dynamics with Z, it should sell closer to 3x-5x revenues. That's assuming you buy into the thesis that it's a high-growth company with a good future in the industry (which I think is reasonable, but it's still not a given). That would put its valuation closer to $15-$25; quite a bit below the current price of $75. I think Zillow is extremely overvalued right now.

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