Zillow (NASDAQ:Z) has been one of the best performing stock of the last twelve months with a gain of over 76% -- despite the overall market slowing down since the start of the year; it is up over 30%. Zillow is an online database of real estate. The company provides a platform to the prospective buyers and sellers, and with some of its products, the company also helps prospective buyers and sellers in making decisions. Zillow mainly derives its revenues through advertisement on its website. On the other hand, it has a partnership with a few newspapers authorizing them to use Zillow's real estate search engine. After its exclusive partnership with Yahoo Real estate, it has now become the biggest real estate advertiser on the internet.
Acquisitions and Partnerships: Drivers of growth
Having a simple business model, Zillow's main strategy for growth is to increase real estate information geographically and also in terms of details. For this purpose, it has made 7 acquisitions in the last three years, the most recent one being, StreetEasy. Considering the company's business, the real estate data has to be standardized in order to increase its accuracy, consistency and accessibility. Zillow has recently partnered up with Real Estate Standards Organization. As the data gets standardized according to MLS standards, the customers of the company will increase. More brokers will be accessing the website and subsequently this will increase the traffic of Zillow's website. As a result, its revenues from advertisements will increase substantially in the coming quarters.
U.S. real estate market is huge and growing rapidly. There are two markets in real estate: Sale and purchase, and Rentals. According to the U.S. Census Bureau, sale of roughly 4.7 million existing homes and 368 thousand new homes represented a total value of $1.2 trillion. There are about 1.2 million real estate brokers in the U.S., and according to a research report by Borrell associates, these real estate brokers spent roughly $7.8 billion for residential advertising while new developers spent around $1.3 billion during the last year. This means that an average broker is willing to spend $6,500 in advertising every year keeping aside the huge market of new developers.
The ability to go mobile and monetize the mobile user base is the necessity for all the technology companies - people now prefer to use their mobile devices to access their favorite websites. Zillow has a strong presence in the mobile segment as 65% of the website's total traffic comes from mobile and it goes up to 70% during the weekends. The company has a total of 27 apps that the customers can easily use to search for their choice of Purchase and Rentals, mortgage and home improvements. This has resulted in increased traffic on Zillow's website. In December 2013, a total of 275 million homes were viewed on Zillow's website through mobile devices. In other words, 103 homes per second were viewed in December.
Zillow currently charges its clients on the basis of cost per thousand impressions (CPM). That is, for every thousand view of a particular advertisement, the client has to pay a certain fee. This method is best known for internet advertising and has many advantages with respect to pay-per-click (PPC) featured ads. In addition, the company has offered brokers and agents with different accounts on the website holding different privileges. This allows the brokers and agents to make their advertising choice according to their budgets while the company caters to a broader market this way.
Zillow is already positioned as the biggest internet real estate advertiser and information hub. Still it is continuing to take steps to broaden its share in the market through further acquisitions and mergers. The recent MLS standardization merger would allow the company to have a better target audience for its advertising as the data gets organized. With growing target audience, its clients will also grow subsequently.
A Look at the Fundamentals
The growth in the stock price has been impressive for the company. However, the growth in revenues has been equally impressive for Zillow. The company has recorded 3-year average annual revenue growth of over 66%. Revenues of the company have jumped from just $66 million at the end of 2011 to $197.5 million by the end of 2013. The growth in revenues is commensurate with the growth in mobile users (57%) - the company has been able to monetize its mobile users effectively. At the moment, the biggest expense for Zillow is marketing and sales, which accounts for 55% of the total revenues of the company. Sales and marketing expense will likely come down as the company increases its presence in the market. It is understandable why the marketing and sales expenses are so high at the early stages of the company.
Technology and development expense is the second largest expense for the company and equals to 25% of the total revenues. The core expenses are quite low for the company such as cost of sales (10%), general and admin expenses (19%) - sales and marketing expenses will come down over the next few quarters, and with growing revenues, the proportion of the other expenses will also decrease. Full-year loss for Zillow stood at $12.5 million; however, adjusted EBITDA was $29.7 million, which included depreciation and amortization, and stock based compensation expense. The gross margin of the company is very high (90%) and a decrease in sales and marketing expenses should also result in an impressive operating margin over the next few quarters.
The market for Zillow is considerably large and the company has made solid progress. Its traffic is increasing and the company also has strong presence in the mobile segment. Furthermore, Zillow has been able to monetize its user base, allowing the company to report massive growth in its revenues. As the growth opportunities still exist for the company; we believe Zillow is a good investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.