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Why Zillow Won't Stay Down for Long

NEW YORK ( TheStreet) -- Shares in Zillow (Z - Get Report) plunged in after-hours trading after the company reported significantly different quarterly results than Wall Street expected.

In other words, analysts totally misread expectations, and Zillow was treated as if it had a roach infestation.

This was despite relatively good reporting metrics for long-term investors -- metrics that in my opinion outperformed another Internet high-flyer, Amazon.com (AMZN - Get Report).

This real estate Web site has one of the best online business models out there. Zillow uses a combination of ads and subscriptions to generate revenue, the model almost every Web site wants because it maximizes the monetization of users so well.

Zillow's users receive the benefits and use the site for free. Meanwhile, Zillow makes money off the ads displayed, and more users mean more ads for the site to display. Real estate shoppers and busybody neighbors wanting to know the values of homes in their area flocked to Zillow.com in record numbers.

In its conference call, the company reported that Zillow served more than 61 million unique users in July, an increase of 66% from the same period last year. Apparently, the trend is far from slowing down. In the previous quarter, Zillow's unique monthly visitor count exceeded 50 million unique monthly visitors for the first time.

Web traffic and subscriber numbers are easy to follow metrics, but the company mixed too many GAAP and non-GAAP numbers, and I believe this ultimately worked against the company's shares in last afternoon trading.

GAAP means "generally accepted accounting principles," and it's the standard companies must officially use for their results. But almost always, companies report some non-GAAP numbers, because they think they better reflect performance.

The GAAP net result was a loss of 30 cents per share. However, if you remove one-time, stock-based compensation costs during the quarter, the company reported a 1 cent profit. Investors focused on the 30-cent-a-share loss and ignored the new record $46.9 million revenue generated.

Z Revenue Quarterly Chart Z Revenue Quarterly data by YCharts

Clearly revenue is on the right track, and free cash flow and super-sized margins create impressive opportunity. The opportunity doesn't come without a price though. The forward looking earnings multiple is over a 100, and I consider anything more than 20 a red flag that requires considerable caution. After adjusting for the growth rate -- and I can't find a reason why the market has it wrong in its expectation that growth will continue -- the P/E ratio becomes reasonable for a long-term investor.

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