Barron's Warns Zillow Shares Could Fall 50%

On July 28, Zillow announced a $3.5 billion merger with Trulia, its online real estate rival. The deal, which was comprised entirely of stock, sent the shares of both companies soaring, but since then Zillow has stumbled, falling about 12%, while Trulia is up 3%.

In pre-market trade on Monday following Barron's story, Zillow shares were down 2% and Trulia shares were down more than 3%.

Alpert writes that Zillow bulls have dubbed the combination "Godzulia" on hopes the two sites will grab "a big piece of the $10 billion that realtors spend annually on advertising."

Zillow CEO Spencer Rascoff told Barron's, "We have the audience. Eventually, the advertising dollars will follow the audience."

Alpert writes, however, that:

"But it's far from clear that the merged Zillow-Trulia will grow revenues enough to match their puffed-up market values. Even if the combined company (which will continue to operate both Websites) achieves the cost savings it expects and gets a growth-stock multiple on the resulting earnings, it would merit a market value of just a few billion dollars. Wall Street ultimately could downsize Zillow and Trulia's stock valuations by half."

Alpert's report is well worth reading in full, and is about much more than a call that the stock will fall. Alpert dissects some of the challenges Zillow could face with regard to pricing power for its ads, as well Zillow's brokerage customers having their own "increasingly slick" websites.

But the headline call that Zillow shares - which are among the most heavily shorted stocks in the market - are overvalued is likely to put the stock under pressure on Monday.