Buy The Dip In Zillow

| About: Zillow Group, (Z)
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Zillow (NASDAQ:Z) operates, an online marketplace that provides information related to homes, real estate listings, and mortgages that enables homeowners, buyers, sellers and renters to connect with real estate and mortgage professionals. It also operates Zillow Mortgage Marketplace, where borrowers connect with lenders to find loans and get mortgage rates.

Zillow has a huge presence in the mobile app market. In addition to offering a scaled down version of its website on mobile apps, Zillow recently launched it's mobile app "Rentals for iPhone." The app offers iPhone users easy access to rental listings and data, making the process of rental shopping a tad easier. Zillow Rentals will even ping users when it spots rentals that match their selected criteria.

Approximately 90% of Zillow's traffic comes from organic search (i.e., free unpaid for search results) and more than half of its visitors come directly to its site without a search, implying a significant amount of brand recognition. In 2010, Zillow signed an exclusive partnership with Yahoo whereby Zillow agreed to exclusively sell advertising to real estate agents and brokers on Yahoo Real Estate and Zillow would supply its for sale listings, as well as it's Zestimate (Zillow issued estimates on home values) to Yahoo Real Estate. This exclusive partnership was extended in April 2012.

According to comScore the Yahoo!/Zillow Real Estate Network across, which Zillow sells advertising to their Premier Agents, is the largest real estate network on the web, twice the size of the nearest competing network or website.

A few weeks ago Zillow introduced pre-market inventory to their search for the first time. This allows people to find detailed information on pre-foreclosures (i.e., homes where a Notice of Default has been issued and homes in foreclosed homes that banks gave up on but didn't put on the market). Zillow spent many months scrubbing the data and providing it in a user-friendly manner. These are homes that aren't listed on MLS or any brokerage websites and were only previously available to investors willing to dig through County Courthouse records or willing to pay fees to websites tailored to provide this information. This information is now available to its visitors for free. This will create a far more compelling product than competitors including Trulia (TRLA).

Q3 results were spectacular, with revenue growing 67% year on year. The Zillow Marketplace division, which includes Premier Agent and Mortgage Marketplace, grew revenues 99% year on year. However, the stock has taken a nose dive in part because of fears about the loss of one of its largest advertisers,, and also in part because of a general market downturn.

The loss of is due to the above mentioned launch of its foreclosure inventory feature. This resulted in negative revenue guidance for Q4. However, I believe this drop is temporary and the current weakness should be viewed as an opportunity to buy the stock. With a dominating market position in the online real estate listings market, and with impressive revenue growth, I believe Zillow is worth a good deal more than the 40 times earnings people are paying for the stock (based on 2013 estimates of $0.55 EPS). Below is a chart of revenue and gross profit growth over the past 3 years. In a market starved for growth, Zillow should be looked at closely.

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.