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I had the luxury to learn from some of the best minds from GARP, global macro and long/short titans. I manage a small fund after working at two investment banks. I only buy stocks that have a potential to double or triple in the next 3-4 years. 2013 YTD performance in China A share and US... More
  • My Take On Zillow: An Asymetric Return  1 comment
    Mar 2, 2013 5:36 PM | about stocks: Z

    Normally I kept my trade ideas to myself and this time as I am 25%+ YTD managing two large accounts YTD in 2013, my fellow fund managers asked for my success. It's asymetric return baby. My longs: GNC, Qihu and Z.

    This report was written over a week ago and had many requests. Last year my first long and then short on EDU generated outsized returns as I posted on SA too.

    ------------------------

    I think Zillow (NASDAQ:Z) is a buy, and a leveraged way to play the US housing recovery theme. Given the current uncertainty on fed easing varying, I would dollar average for a few times.

    The macro drivers are:

    1. Recovery of the home prices:

    Starting late last year the Case Schiller market showed mild rebound; the fed debate on varying the easing will put pressure on housing and equities market, and that will be a great entry point; fed's slowing down in buying proves the confidence in recovery, too.

    2. The overall spending on real estate (the total pie) is increasing and so are the # of brokers in real estate and their ARPU online spending.

    3. The brokers make 5%-6% of property sales, which leaves lots of room for ad spending.

    4. Potential upside from rentals and mortgage ads, which are both big, especially in. mortgages.

    Micro Level drivers:

    1. Internet traffic, unique visitors and sales agents subscription all going up.

    2. Zillow changes the current model by:

    "According to a summary of Zillow Mortgage Marketplace[13] written by Bernice Ross from Inman News on May 25, 2009, Zillow improved the online loan application process by doing the following:

    • Buyers can remain anonymous: Both traditional and online lenders normally require extensive information before they will give the buyer a rate quote. Since buyers want to avoid being solicited by a number of lenders, many are reluctant to reveal their identity. Furthermore, buyers are justifiably concerned that multiple inquiries will harm their credit report. In contrast, Zillow gathers enough information to create a legitimate loan quote. They do not, however, require the buyer to provide their name, address, phone number, e-mail address or Social Security number. The buyer remains anonymous until he or she is ready to contact the lender. This also eliminates the hassle of unwanted e-mails and phone calls from multiple lenders.
    • An average of 18 quotes: The LendingTree model provides the borrower with four quotes. Zillow provides an unlimited number of loan quotes from thousands of competing lenders. In fact, the typical borrower on Zillow receives 18 loan quotes. Each lender sees the other competing bids. This means great savings for the borrower.
    • Apples-to-apples comparison: One of the most difficult aspects for consumers is choosing which combination of rates and fees is best for their situation. Zillow requires all participating lenders to divulge their rates plus all fees. This allows buyers to do accurate comparisons. Their system also allows borrowers to filter various loans by rate, fees, monthly payment, annual percentage rate (APR), lender rating, and distance to the lender."[1]

    I like the No.1s and No.2s in a market that goes through transformations or "paradigm shifts", which will last for a few years.

    Valuations:

    EV:1.4bn-300m (net debt)=1.1bn

    2013 EBITDA: 20.6m

    EV/EBIDTA =53x

    EBITDA is low but that's due to large SG&A, which increases over 50% yoy but will start to normalize in future years. That's good sign as the company is investing in sales, etc. In fact it's so aggressive that the company will even incur a loss.

    If we look into the PEG ratio, with the growth rate in net income, it doesn't look that expensive.

    [2]

    I know it sounds crazy, but I'd give it a 2bn valuation at end of 2014. From current $1.4bn market cap to $2bn at the end of 2014, its implied annual return is about 20%.

    It looks very "expensive" from a PE multiple perspective; but from a growth perspective, I see it goes into a $5bn company in 3-4 years.


    [1] http://en.wikipedia.org/wiki/Zillow

    [2] GS research report.

    I think Zillow (Z) is a buy, and a leveraged way to play the US housing recovery theme. Given the current uncertainty on fed easing varying, I would dollar average for a few times.

    The macro drivers are:

    1. Recovery of the home prices:

    Starting late last year the Case Schiller market showed mild rebound; the fed debate on varying the easing will put pressure on housing and equities market, and that will be a great entry point; fed's slowing down in buying proves the confidence in recovery, too.

    (click to enlarge)

    1. The overall spending on real estate (the total pie) is increasing and so are the # of brokers in real estate and their ARPU online spending.
    2. The brokers make 5%-6% of property sales, which leaves lots of room for ad spending.
    3. Potential upside from rentals and mortgage ads, which are both big, especially in. mortgages.

    Micro Level drivers:

    1. Internet traffic, unique visitors and sales agents subscription all going up.
    2. Zillow changes the current model by:

    "According to a summary of Zillow Mortgage Marketplace[13] written by Bernice Ross from Inman News on May 25, 2009, Zillow improved the online loan application process by doing the following:

    1. Buyers can remain anonymous: Both traditional and online lenders normally require extensive information before they will give the buyer a rate quote. Since buyers want to avoid being solicited by a number of lenders, many are reluctant to reveal their identity. Furthermore, buyers are justifiably concerned that multiple inquiries will harm their credit report. In contrast, Zillow gathers enough information to create a legitimate loan quote. They do not, however, require the buyer to provide their name, address, phone number, e-mail address or Social Security number. The buyer remains anonymous until he or she is ready to contact the lender. This also eliminates the hassle of unwanted e-mails and phone calls from multiple lenders.
    2. An average of 18 quotes: The LendingTree model provides the borrower with four quotes. Zillow provides an unlimited number of loan quotes from thousands of competing lenders. In fact, the typical borrower on Zillow receives 18 loan quotes. Each lender sees the other competing bids. This means great savings for the borrower.
    3. Apples-to-apples comparison: One of the most difficult aspects for consumers is choosing which combination of rates and fees is best for their situation. Zillow requires all participating lenders to divulge their rates plus all fees. This allows buyers to do accurate comparisons. Their system also allows borrowers to filter various loans by rate, fees, monthly payment, annual percentage rate (APR), lender rating, and distance to the lender."2

    I like the No.1s and No.2s in a market that goes through transformations or "paradigm shifts", which will last for a few years.

    Valuations:

    EV:1.4bn-300m (net debt)=1.1bn

    2013 EBITDA: 20.6m

    EV/EBIDTA =53x

    EBITDA is low but that's due to large SG&A, which increases over 50% yoy but will start to normalize in future years. That's good sign as the company is investing in sales, etc. In fact it's so aggressive that the company will even incur a loss.

    If we look into the PEG ratio, with the growth rate in net income, it doesn't look that expensive.

    (click to enlarge)3

    I know it sounds crazy, but I'd give it a 2bn valuation at end of 2014. From current $1.4bn market cap to $2bn at the end of 2014, its implied annual return is about 20%.

    It looks very "expensive" from a PE multiple perspective; but from a growth perspective, I see it goes into a $5bn company in 3-4 years.

    2 en.wikipedia.org/wiki/Zillow

    3 GS research report.

    3

    Disclosure: I am long Z, GNC, QIHU.

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    Author’s reply » I am very disappointed as Z only went up to 30% since I recommended and my whole portfolio only went up 40% YTD. Had I stuck to GNC I would be the same, 40%+ YTD! Gee....
    29 Apr 2013, 04:30 PM Reply Like
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