Zillow, Inc. (NASDAQ:Z) was socked today with the announcement of a class action lawsuit. The suit, filed by Robbins Geller Rudman & Dowd LLP, alleges that Zillow concealed its “difficulties” in acquiring new paying subscribers and in dealing with subscription account churn during a recent Class Period in September when the company was making a secondary stock offering.Zillow is an online real estate information site that allows the public to see data on US residential properties, along with real estate-related related advice, for free. Although its display advertising revenues are growing — for the fiscal quarter ending September 30th ad sales grew year-over-year from $7.217 thousand to $8.299 thousand — ad revenues dropped significantly as a percent of total revenues, from 38% to just 26%.And that makes Wall Street nervous. So nervous in fact that it’s one of the reasons why Zillow’s stock tanked from a September high of $43/share to the mid-$20s after its quarterly earnings announcement on November 5th. This is appreciably higher than it’s original 2011 IPO price of $20/share (take that Facebook!) but still a nasty shock to some investors. Hence the lawsuit.From our perspective though, we’re very impressed with Zillow’s current business, in large part because their subscription revenues are increasingly a dominant part of their revenue model. In the last fiscal quarter, Zillow’s subscriber base grew 80% year-over-year. As of September 30th, the service had 26,703 subscribers paying an average of $270 per month. That’s 11% higher than the September 2011 average of $242.Perhaps these subscription numbers aren’t as rosy as investors had been led to believe they would be for the time period. But they’re absolutely nothing to sneeze at, and do not appear to us to be indicative of an acquisition or churn problem.We suspect the real problem may be the fact that Wall Street just doesn’t get subscription business models. As Tien Tzuo, CEO of Zuora, noted in a column at AllThingsD.com yesterday, “as much as investors love subscription businesses, Wall Street has a fundamental misunderstanding of how to accurately value them.”Does that mean for smart investors, the next few days could be a great time to pick up some Zillow stock on the cheap?
