Should You Play Hoopla With Zoopla Property Group PLC?

Shares in property website Zoopla (LSE: ZPLA) were well received on the stock market yesterday, finishing the day at 227p in grey market dealing, 3% above their 220p issue price. Full market dealing starts on Monday.

A sensibly-priced tech stock that’s a play on the general theme of an industry moving from print to digital, benefiting from the buoyancy of the UK housing market — at first blush, it looks appealing. Though only institutions could participate in the IPO, should private investors now play ball? Should you play hoopla with Zoopla?

The Price Is Right?

It certainly isn’t a cheap stock. The price was set to match the 22 times forward P/E of its bigger rival Rightmove (LSE: RMV). It represents a massive 44 times Zoopla’s earnings for the full year to September 2003, which was also the first year the company made a profit.

That valuation gives Zoopla a market cap of £918m, and should see it enter the FTSE 250 next September. Just 38% of its stock was floated with former controlling shareholder Daily Mail (LSE: DMGT) reducing its interest from 53% to 34%.

Rightmove (which seven-bagged between listing in 2006 and the beginning of this year before coming off 20% in 2014) provides a paradigm for Zoopla. The companies charge estate agents fees for listing properties, and have similar volumes of business with over 1m properties listed on their websites. But Zoopla’s margins are a third below those of Rightmove’s, providing more scope for earnings improvement. If I were a Rightmove shareholder, I’d certainly look hard at jumping camp.

Duopoly — for now

The two companies are a duopoly, with 90% of house purchases conducted through estate agents and internet-searches becoming the house-hunting method of choice. A third network of estate agents, Agents Mutual, is launching next year but the network effect creates barriers to entry that should limit competition. Perhaps the biggest long-term threat is from new entrants taking estate agents out of the picture altogether, such as Stelios Haji-Ioannou’s, but for all they complain about them, British homeowners seem reluctant to part with estate agents.

What of the housing bubble? Zoopla and Rightmove make their money from volumes of transactions rather than value but inevitably the business is cyclical, and many might think the existing shareholders are shrewdly selling down at the top of the cycle. Zoopla’s success is a reminder of how cleverly DMGT has played the fundamental shift in its industry, as advertising revenues have shifted from print to digital. Selected as the Motley Fool’s top share pick for 2013, DMGT’s share duly put on 70% in that year and they have a firm place in my portfolio.

Big gains

But currently Zoopla's downside risk outweighs the upside in my book. There are other companies more assured to profit from the growth in Britain's economy. A brand new report from The Motley Fool identifies three shares that should profit the most. At a time when share valuations are around record highs, they're amongst just a handful of stocks that could make really big gains this year. To find out more, download the report straight to your inbox. Just click here -- it's free and without obligation.

Tony owns shares in DMGT but no other shares mentioned in this article.