Zillow: Follow-Up To Investor And Analyst Day And Current Investment Analysis

| About: Zillow Group, (Z)

Zillow (NASDAQ:Z) on March 27, 2013 hosted an Investor and Analyst day. I went through the Investor and Analyst Day Conference transcript and found that I had some follow-up questions. I posed my questions to Katie Curnutte, director of communications at Zillow, and a company spokesperson. Below are my questions and her answers, for consideration. My questions are in bold.

Following the interview is my analysis of the current investment opportunity that Zillow represents, looking at current valuation metrics and also taking into account the information gleaned from the investor day and my follow-up interview.

Please take a few sentences to expound on the Zestimate, and why it is such a great tool.

The Zestimate is a starting point that helps consumers determine the value of a home. Prior to Zillow, information about homes and home values was difficult or impossible to obtain. Zillow brought this information out into the open, along with information about recent sale prices and other data that can help consumers make smarter decisions about homes.

Please comment on the Zillow database, about which Richard Barton, Co-Founder and Executive Chairman stated:

This database is our competitive advantage. It is our competitive differentiator. It is what constitutes the moats around our business, and it is what serves as the connective tissue amongst all of the marketplaces that we're building, that you'll hear about.

What specifically about the Zillow database gives Zillow an enduring, competitive advantage?

We have information about 110 million homes across the country culled from public records, but also from users themselves. Users have edited information about homes more than 20 million times, resulting in a truly unique database that is impossible to replicate.

Additionally, Zillow's relevance to consumers across all phases of the home lifecycle, from renting, to buying and selling, to financing and now, to home improvement, sets us apart from competitors.

Richard Barton commented on the potential market opportunity for Zillow thusly:

The biggest chunk of identifiable TAM for Zillow in the U.S. is actually the agent commission dollars. So the U.S., to scale, it's a relative scale, looks like this: $59 billion in agent commissions, and Zillow's enterprise value currently at $1.7 billion.

What are the 3 or 4 most critical things Zillow has to accomplish or execute to capture the majority of this TAM?

At Zillow, we always innovate for the consumer. Thinking of consumers first and creating the best possible experience for them grows our traffic - we now have 50 million monthly unique users.

We also operate the most popular suite of real estate mobile apps across all major platforms. And with real estate consumers accessing more and more information on a mobile device (more than 50% of our traffic now comes from mobile), our leadership in the mobile space sets us apart.

Agents spend a percentage of their earned commissions on marketing and business services. We want them to spend those dollars on Zillow, and for this to happen we have to have a large and engaged audience of homebuyers, on the Web and on mobile.

CEO Spencer Rascoff mentioned that Zillow has "4 marketplaces: real estate, mortgages, rentals and home improvement." What one thing does Zillow have to do or what is the biggest challenge in each marketplace that has to be overcome to most successfully grow the respective businesses?

In all of the marketplaces, our biggest challenge is always to continue to innovate on behalf of the consumer and to grow traffic and usage. Our marketplaces are all in different stages: the Real Estate and Mortgages marketplaces are the most mature, with robust traffic and well-functioning monetization models. For our other, newer marketplaces (Rentals and Home Improvement), our goal is to build that traffic and then to figure out the most effective monetization models.

There are 30,000 Premier Agents. There are somewhere on the order of 2.1 million licensed real estate agents in the US. Obviously there is a lot of room for growth here. What unique features of the Premier Agent platform will enable it to out-compete other ways for agents to acquire business and thus allow the Premier Agent program to sign up large numbers of agents over time?

The biggest differentiator for Zillow is the millions of motivated homebuyers and sellers who use our site and mobile apps - by far the largest audience in our category. More than 50 million unique users visited Zillow on mobile and Web in March 2013. According to Experian, Zillow's mobile audience is more than double our nearest competitor. Additionally, Zillow powers Yahoo! Homes and HGTV's FrontDoor.com, giving Premier Agents exposure across an enormous real estate landscape.

But we also offer tools and services to our Premier Agents that help them convert those leads into sales more efficiently. For example, Zillow offers free agent websites to Premier Agents and customer relationship management software (a CRM). That means Premier Agents have access to an enormous pool of potential clients, as well as the tools to help them better meet the needs of those clients.

Obviously Zillow's stock price has had quite a run these past few months. Clearly the market has recognized that Zillow is executing in the early phases here. However, despite the run-up, please make the case for Zillow as a long-term buy right now ?

We don't comment on stock price, but we are squarely focused on managing our business for the long-term. We're making decisions - like the decision to advertise and take advantage of the enormous brand whitespace ahead of us - for the long term. Zillow will be a brand that our children and grandchildren use.

Can you estimate Zillow's revenue growth rate and net income growth rate annualized over the next 5 years?

Based on the size of our opportunity relative to the current size of our revenue, we have a very long runway ahead of us.


Zillow is an interesting way to play the housing boom. Zillow aims to be the go-to company for buyers, sellers, renters, home borrowers, and even people looking to remodel. As noted above, Zillow has launched business segments to address each of these areas. Zillow's quarterly execution was slightly above consensus expectations throughout 2012 on a revenue basis, and well above expectations on an earnings per share basis. Zillow's stock price has exploded recently, up 99.8% over the past three months. This begs the question: Is Zillow a buy, hold or sell today?

Current Valuation (courtesy Yahoo! Finance)

P/E (NYSE:TTM): 289.94

Forward P/E (est. 12/31/14): 63.65

Price/Sales : 14.60

Price/Book (mrq): 6.07

Clearly, on the basis of trailing P/E, Price/Sales, or Price/Book, Zillow is very expensive, and the current share price cannot be justified.

However, as a rapidly growing company, one must consider using the metric of forward P/E. On this basis, if we assume a forward earnings and revenues growth rate of, say, 50% annualized, Zillow actually seems pretty fairly valued.

An even more interesting way to look at Zillow, however, is one which Zillow executives suggested at Zillow's Investor and Analyst Day. That is to look at the enterprise value of Zillow versus the size of the market that Zillow is trying to address. As noted above, Zillow is trying to address multiple markets, but the market that Zillow Co-Founder and Executive Chairman Richard N. Barton chose to explore is U.S. real estate agent commission dollars. As noted above, he said:

The biggest chunk of identifiable TAM for Zillow in the U.S. is actually the agent commission dollars. So the U.S., to scale, it's a relative scale, looks like this: $59 billion in agent commissions, and Zillow's enterprise value currently at $1.7 billion.

Another way of looking at Zillow's market opportunity, as also noted above, is the fact that Zillow currently has 30,000 Premier agents, out of 2.1 million active agents in the USA.

By the first metric, Zillow has achieved market cap/market size ratio of 2.88%. By the second metric, Premier Agents/total agents, Zillow has achieved penetration of only 1.43%.

If Zillow can continue to grow revenues and profits rapidly and achieves market penetration of even 30% by either of these metrics, we can expect Zillow's market cap (and share price) to grow to perhaps 10 times what it is today. With 30% annualized growth rates, this could be achieved in 11 years.

How does 10x your investment in 11 years sound?

If Zillow can continue to execute over the long term, the current share price will prove to be very cheap. Of course, that's a big "if".

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in Z over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.