Stock Report – Zillow Group

Zillow Group: Economising the world of real estate data


Formed in 2006, Zillow Group (Z) is a US digital real estate database that has seen significant growth over the years. Since its inception, the website has evolved into a databank featuring house valuations, property listings and market data.

One of the key components to Zillow’s business model is the revenue it generates from selling advertising space on its website for listings. It also has various agreements with news agencies and Yahoo to push its real estate search engine to a wide audience. As part of a rental management platform, the company takes a fee from tenants who pay their rent via its portal. The final piece of the puzzle is Zillow’s home buying service, purchasing homes from sellers and relisting them for sale.

In 2011 the business listed on the Nasdaq at $20 per share. Since then the stock has enjoyed periods of strength, although there have been downturns along the way. Nevertheless, its valuation has surged from US$539m to nearly US$10bn. During this time the business has lifted revenue from US$30.5m to US$1.3bn, but there is still a lot more to play out in this story.

An eyeball driven strategy

Central to Zillow Group’s strategy is an emphasis on providing comprehensive real estate data free of charge. With data that covers well in excess of 100 million homes across the US, the company has managed to build a position of significance for property buyers and sellers to flow through its sites.

This has set the foundation for a strong following of users, including those from both the private and commercial sectors. In turn, this has incentivised parties to list their properties for sale on the website, whereby the company can claim revenue from those who advertise their listing.

In much the same way that companies like Uber (UBER) and Amazon (AMZN) have economised data to leverage their invaluable status in the market, Zillow is doing the same in the real estate sector. With an eyeball driven strategy, the company is able to absorb the costs of providing free data in order to build its user base and engage with them to capture revenue from its paid-for services.


A core business starting to mature

While high-growth stocks are often not associated with a maturing business, Zillow’s deteriorating share price late last year was on account of concerns that the core business appeared to be going backwards. In particular, increasing churn numbers among real estate agents were a concern.

However, in its most recent quarterly results, the company has noted that its premier agent business, which sells ad space, has seen churn reduce to ‘normal’ levels. In addition, a new flexible pricing model for agent fees has seen positive results.

As a result, adjusted EBITDA from this segment rose 31% to US$61m. Meanwhile, year-on-year revenue growth of 2% to US$217.7m shows that there is a solid core business from which to push and launch Zillow’s other services. One look at the balance sheet reinforces this, with the business sitting on more than US$1.6bn in cash and total debt below half of that.


Expansion and scale is set to emerge

While the core business has shown signs of stabilising, Zillow Group’s other divisions are experiencing significant growth. The most prominent of these ancillary services is its ‘Homes Offers Market’, where the company buys houses from owners and sells them to interested buyers.

Despite early indications that losses from this venture were weighing on the balance sheet and stock price, the company’s expansion has proved fruitful thus far. During the last quarter, Zillow bought 898 houses and sold 414, up 80% and 200% respectively. Since then, it has entered its tenth US market and has plans for another 10 in the near-term, including densely populated areas like Miami, Los Angeles and San Diego.

Over the long term, the company is targeting as many as 5000 homes for resale each month. If they manage to execute on this strategy, they stand to reap as much as US$20bn in revenue. In the meantime, first quarter revenue was US$128.5m, which suggests there is a significant upside as the company invests in new markets. This will also afford Zillow the opportunity to increase its margins from around 2-3% to 4-5% as it acquires bigger homes, holds properties for shorter periods and lowers its operating costs via economies of scale.

Other higher-margin opportunities are also available to the business by leveraging its extensive user base and reputation. These include moving services, insurance coverage, home renovation services, title and escrow services, home warranty and mortgages – the lattermost of which, is an early stage venture for Zillow. Herein, there are several revenue streams available to support organic growth, yet alone its numerous acquisitions.


Making itself an essential service provider

Since its time as a publicly listed company, Zillow has not only managed to secure its position as a dominant real estate database, but it has managed to diversify its offering. It offers users a free and convenient option to source property data, plus place listings. This ensures the company will continue to gain traffic, monetising its data among those who use its other services.

The core business is a cash cow and has started to stabilise, which is a sound platform to support investment into higher growth initiatives. In these areas, the company is hoping to become a disruptor that empowers real estate agents over mortgage brokers. Strong top-line growth in Zillow’s home buying venture is an encouraging sign, and with the expansion plans ahead, which will bring sizeable scale and opportunities to improve margins, the stock price can race higher from here.