Zillow: The Next Apple

| About: Zillow Group, (Z)

The Internet is still disrupting the way that we do things and there is money to be made on this change - albeit slower than we are used to with dot com high-fliers. Best Buy (NYSE:BBY) is struggling, largely due to Apple (NASDAQ:AAPL) and Netflix (NASDAQ:NFLX). Amazon (NASDAQ:AMZN) is pondering same-day delivery. And Realtors are scratching their heads about Zillow (NASDAQ:Z).

I am fortunate to live in an area where housing has turned into a seller's market. This comes with a caveat: it is only a market for sellers of turn-key homes. New or used, if the house doesn't have every and all attainable features desired by the average buyer, then it will not sell. The cause of this is not difficult to trace, as bankers are hesitant to provide equity loans for home improvement purposes - the bane of Home Depot (NYSE:HD) and Lowe's (NYSE:LOW). Customers are demanding finished homes that do not require improvements. Having recently purchased a new home, I understand this completely.

More recently, a coworker put her house up for sale, provoking a lot of water cooler discussion (one of my favorite workday medications). Most notable was the realization that the typical Realtor fee is six percent - $12,000 on a $200,000; $30,000 on a $500,000 home sale. Not cheap. I didn't have to mention Zillow, as the seller already knew about the free "For Sale by Owner" option that the company provides in addition to its popular core home-valuation service.

The home sold in just two days. Mind you, it was a very nice home that had been finished with all of the bells and whistles that are necessary to sell in this market. At first, I suspected that the home had been priced too low. But a quick check revealed that it was priced on the high side of recent comparable sales in the area - all with similar condition and feature sets. The sale has since closed and the seller walked away with 100 percent of the sale instead of just 94 percent - impressive.

Although the real estate market is in horrible shape by any standard, the math still bodes well for Zillow. Sales of existing homes are on track to hit 4.47 million annually with an average sale price of $187,300. New home sales are on track to hit 372,000 annually with an average sale price of $224,000. Combined, this works out to a total market of $920,559,000,000. Realize that a healthy market will be well over a trillion dollars annually.

Zillow is to Realtors what digital media is to Best Buy. Today, the company is peripheral to real estate sales, taking only the scraps that fall from the table. As it becomes more popular with increasingly digitally-enabled consumers, it will have the opportunity to position itself squarely in the middle of this market. There is huge room to undercut the existing six percent commission from Realtors. Even at half percent, the market potential works out to nearly $5 billion in revenue using today's anemic numbers. And there exists a need to produce a coordinated, cohesive end-to-end product: search, appraisal, title and mortgage. If Zillow management can execute, it can add value to every aspect of the transaction.

But, first, it needs to improve its for sale by owner service. As it sits now, buyers and sellers are left to coordinate home viewing/inspection on their own - something that can be awkward without a neutral third-party to unlock the door and supervise potential buyers. I am into my second home and, in both instances, this is the only real service that my Realtors provided (everyone else involved got their own check at closing).

Is babysitting worth 6 percent? The bully has been taking our lunch money for way too long. Buy Zillow.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

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