Homestore Inspection

Baldwin Louie — Mon, 28 May 2001 18:00:00 -0400

Homestore is a survivor (and has been widely lauded as such by this magazine and Business Week, among others). In a year when other dot-coms were folding left and right, the Southern California-based Homestore has carved out a powerful brand in online realty - so powerful it's being investigated by the Justice Department. Revenues are booming: $105.5 million in the last quarter alone, a 173.3 percent increase over the same period last year. Shares of Homestore are up 64.2 percent this year; the SP (dossier) 500, by comparison, is down 2.5 percent.

But that stellar success has come at great cost - a cost not always reflected in Homestore's pro-forma earnings results. Homestore has been bold in its use of unregistered stock to pay for operating expenses. The company has doled out more than 6 million shares to marketing partners and real estate brokerages. "Most technology companies report pro-forma results," says Homestore Chief Operating Officer John Giesecke. "These were not just stock-for-revenues deals. We are creating partnerships here."

Typical of these is Homestore's recent deal with Bank of America (BAC). On April 10, the two companies announced a "$10.5 million marketing and Web-services agreement" that would allow Homestore access to BofA's 3.2 million online bankers. Analysts and investors figured that meant some $10.5 million in revenues to Homestore, and the stock surged 22.8 percent in a day. But in the company's quarterly report on May 15, Homestore reported giving Bank of America $13.4 million worth of stock for the deal. The company has signed similar stock deals with Broker Gold, Budget Truck, GMAC, Norwest and a host of multiple real-estate listing services.

Like a guest on the Jerry Springer Show, Homestore hasn't been bashful; the company plainly reveals its unregistered shares in public filings, warts and all. But it's taken the unusual result of eliminating these stock-related payments from its pro-forma results. Excluding all the stock deals, it looks like Homestore.com (HOMS) has big profits on little expenses. But by reworking Homestore's accounting to include stock-related costs, Merrill Lynch analyst Henry Blodget finds the company faces another $15.6 million in expenses in the most recent quarter. Adding that in, Homestore's stock trades at 114 times Blodget's 2002 earnings estimates.

Worse, Homestore's "partners" aren't always taking much risk on Homestore shares. America Online (dossier), for example, took $20 million and 3.9 million shares of stock to sign a massive marketing deal. But AOL also extracted a guarantee from Homestore that the stock will get to $68.50 by the third, fourth and fifth year of the agreement. If it doesn't, Homestore has agreed to pay AOL the difference. From AOL's perspective, it's a no-lose arrangement; if the stock goes to $100, AOL wins; if the stock goes to $10, AOL still gets a cash or stock payment of $68.50 a share.

The crowd on Wall Street is looking on with disgust, and piling on short-selling of Homestore shares, in a bet that the stock will fall. Short interest in Homestore is now at an all-time high.

Meanwhile, insiders at Homestore are selling stock. This year alone, Wolff and a family trust he controls have cashed in $178.4 million in Homestore shares. It doesn't take a Ph.D. to see that it all adds up to a risky future for Homestore.

Correction:
Clarification: The cost of Homestore.com's marketing agreement with AOL is limited to $110 million, $20 million of which has already been paid. Also, Broker Gold is not a partner of Homestore. Recently corrected figures from First Call/ Thompson Financial show Homestore CEO Stuart Wolff and a family trust he controls have sold $8.9 million in stock this year.

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Homestore Inspection