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Over the last two months, Zillow ("Z") stock has dropped by about 45%. It dropped ~20% in one day after its 3rd Q earnings release on November 5th.

Zillow CEO Spencer Rascoff appeared on CNBC and expressed his confusion over the major decline in the stock price post the earnings announcement and explained why he thinks the business is worth more today than it was last month; not less. The company beat Q3 revenue expectations, matched EPS expectations and managed to add 4,000 premier agent subscribers (a key driver of revenue).

A fellow Seeking Alpha writer wrote a great overview on why he believes Zillow ("Z") is a great purchase at these prices.

Specifically he correctly points out that Q3 earnings will really positive:

"For the quarter, Zillow reported record third quarter revenues of $31.915 million, which beat analyst estimates of $31.66 million. On an earnings per share front, the company reported a profit of 7 cents per share, matching expectations. In the year ago period, Zillow reported revenues of $19.057 million, and a 2 cent per share loss."

Since then the business case has only become more compelling as Julian Hebron on a housing blog wrote a great article entitled "Ignore Zillow at Your Own Risk" about how Zillow's business is only becoming more diverse and stronger.

The bulls have made a strong case for the company but short sellers have continued to push the price down. Since February short interest has risen from 630 thousand shares to a whopping 7.6 million, one of the highest short percentages of float on the entire U.S. stock exchange!

Citron Research published a hit piece on the company on September 25th outlining their dislike of the company. PAA Research published a great response to each of their points.

PAA Research comes to the conclusion:

"In the context of our estimates and the enormous total addressable markets in which the company operates, we think Zillow shares are attractively valued. We anticipate the stock could trade to 35-40x our FY14 EPS estimate within the next 12-months as investors gain greater understanding of the transformational role Zillow can play in the residential real estate market. On a much longer term basis, we anticipate Zillow could generate $1 billion in revenues with EBITDA margins in excess of 40%, which suggests upside in the stock could be far greater than our $50 near term objective."

Short sellers are able to pressure the market with aggressive selling thereby scaring shareholders into selling thinking that there must be something wrong with the company since the price is going down. I view this significant short interest as an advantage as you can now purchase the stock at a cheaper price and it also allows for a faster upward movement if positive news comes out and buying is sparked.

The Zillow business case is still intact. The company was able to sell $156 million of stock at $43 a share a month ago to educated investors. If you believed in the story then, things have only gotten better and clarity on the execution of the business plan has only gotten clearer with the positive Q3 results.

One should view the low market price as a gift from short sellers to allow one to purchase stock at a cheap level. If Zillow continues to outperform on the business case, short sellers will be forced to cover thereby driving up the price.

It is essentially a game of poker here. The longs and shorts both have the same information available. The shorts appear to be the chip leader and are therefore able to control the betting. So far we've only seen the flop, but we still have two more cards to come. The bulls are holding pocket Aces and the flop has so far shown 3 unsuited, unpaired low cards. Don't let the chip leader bully your decision on whether to hold or fold by his decision to go all in.

Zillow has a great business plan which they have managed to execute brilliantly to date. If you believed in the story 6 months ago or a year ago things have only improved. I recommend purchasing shares at this discounted level and ignore your gut which is telling you that the share price has gone down so there must be something wrong with the company. If Zillow beats earnings next quarter or some other positive catalyst comes along, shorts will be squeezed and should make the stock rise dramatically.

As Zillow mentioned on their earnings call:

"We continue our march towards reaching our near-term target model of 30% to 35% EBITDA margin at $200 million to $250 million in revenue. This was another fantastic quarter for Zillow, one that exemplifies the high degree of operating leverage that we have in this model."

Zillow currently only has "a 2.3% penetration of U.S. real estate agents" which means there is significant room for growth. As the real estate market continues to improve so should the companies earnings. Look to also see more of the offline advertising move to online in 2013.

Disclosure: I am long Z. 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. Purchased yesterday and will continue to be a buyer if prices decline.

Source: Zillow: Significant Short Interest Is A Gift That Should Be Exploited