Investment Thesis
Zillow's (NASDAQ:Z) 4Q results and guidance reflect how the company is transitioning to grow the Homes business and is now essentially a call option on iBuying. There could also be potentially significant changes in the competitive landscape following Realtor.com decision to expand OpCity lead routing.
Following a disappointing 2018, Zillow is set to invest heavily in its Homes segment, expanding the company's total addressable market, while guiding toward $115M in revenue and -$33M of EBITDA in 1Q19. It also expects to purchase 5k homes per month in the next 3-5 years, with annualized Homes revenue reaching $20B.
We are optimistic about the opportunity, but we don't want investors to underestimate the execution risks including asset intensity, logistical challenges, tight margins, and higher investment. Additionally, we believe this business won't be EBITDA positive before 2023. Given Zillow's venture-like structure, especially with the return of Rich Barton, we expect the durability of the core business and Homes' traction to drive earnings power and the multiple investors are willing to pay.
Regarding Realtor.com's expansion of OpCity lead routing, we're expecting the move to drive more spend to Zillow, softening the blow of its own model changes in the Premier Agent transition. Although this doesn't change the poor medium-term outlook for the Premier Agent business, it suggests that Zillow's guidance for the business might be conservative.
For every 10% of Realtor.com lead generation budget shifting to Zillow, it could add ~4 ppts to PA revenue growth by our estimates. We see the disruptive headlines and concern among agents as a positive for Zillow near term, and longer term, as this should help its own shift to Flex Pricing commission-based lead sales.
Despite the overall positive outlook in the long-term, near-term challenges and the fairly high current valuations at ~6x P/ Sales, drive
