From its recent stock high of $138 per share, Homestore.com (Nasdaq: HOMS) seemed unstoppable as it soared above other dot coms in technology and real estate. But a confluence of events has put some reality back into the valuation. Fortunately for Homestore stockholders, none of the mitigating factors that have driven the stock's price downward has anything to do with the quality of its offering or its leadership. In fact, while the stock tumbles, the analysts praise Stuart Wolff and his vision for the company.

CBS MarketWatch online editor, Bambi Francisco, calls e-real estate Homestore's to lose, and says the company's market dominance and management is worth betting on. For evidence, she cites that four of Homestore's six Web sites ranked in the top ten most visited real estate sites in December, as measured by Nielsen/NetRatings.

Recently valued at $6.5 billion, the stock is currently trading at 45 times this year's projected sales. Francisco notes that the nearest example of a vertical portal, CNet, trades at 27 times sales. Stock historians recall that just before the crash of 1929, the highest value to earnings stock was trading at 30 times earnings. But this isn't 1929. This is the era of the small trader, the mutual fund, and the market gorilla. Valuations have traditionally soared in certain industries while leaving others behind. In the twenties it was manufacturing and utility stocks leading the way. Now, stocks that serve or leverage the Internet are sovereign.

In the e-home arena, Homestore is the gorilla, having sewn up the majority of home listings, and integrated partnerships with the most influential trade organizations associated with the home transaction - the National Association of REALTORS and the National Association of Homebuilders. Over 70 percent of its revenues comes from serving the members of these organizations with a variety of products from Web sites to forms.

Despite market dominance, Homestore shares are slipping, but that is not surprising. As expected, Federal Reserve Chairman Alan Greenspan raised interest rates in early February, but he also made it clear that interest rates will likely rise further. Industries which are sensitive to interest rate changes such as the home and loan industries tumbled. Witness the valuation that the market has recently assigned E-LOAN. Despite dominating the Internet in online loan originations and increasing revenues, the stock has sunk below its initial offering price of $14, and is showing no signs of turning around.

Add to that the fact that Homestore just released an additional 8 million shares into the market in a secondary offering. Half of those shares were sold by insiders, including the N.A.R., which sold 500,000 shares, reducing its stake to 5.4 percent of the company.

And there is market uncertainty about online sectors in general. Just how well does the Internet serve traditional industries such as real estate? Will people really buy a home online?

If traffic numbers are any indication, they will. Homestore's flagship site, Realtor.com, ranked as the number one most visited site in December of all real estate sites. Visitors stayed for long visits, too, remaining on the site an average of 24 minutes. That's sticky by any site's standards.

The stock dip may only be temporary, say some analysts. Homestore slumped to 72 in early January only to shoot up to over 120 within a two-week period.

Then there also remains to be seen - what the company is going to do with the $400 million or so raised in the secondary. It will be interesting to hear the next few announcements from Homestore.

Also See:

Published: February 25, 2000

Use of this article without permission is a violation of federal copyright laws.