Zillow Group Inc. (Ticker: ZG and Z) - Brief Breakdown
In our Brief Breakdowns, we pick a stock and take opposite sides – one of us presents the bullish argument and the other presents the bearish argument.
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Company Description
Zillow Group Inc. is an American online real estate marketplace created by Rich Barton and Lloyd Frink, both former Microsoft executives and founders of Expedia and Hotwire.com. Zillow is a media company that generates revenue primarily by selling advertising on its website. In 2011, Zillow and Yahoo! Real Estate launched an exclusive partnership, creating the largest ever web-based real-estate advertising network. In addition to advertising real-estate, Zillow also allows landlords to accept rent payments online. In 2018, the Zillow Group began operations as a blanket referral fee network without an upfront cost called Zillow Flex. Also in 2018, Zillow announced it was launching Zillow Offers and would purchase homes directly from sellers, doing any necessary repairs before reselling it. Shares of Zillow Group (Z, ZG) split in 2015 creating a non-voting Class C stock that was divided up between its Class A and B shareholders, who got two shares each of the new stock for each share they owned. Zillow wants to use the new stock (Ticker: Z) to make acquisitions and compensate executives.
Quantitative Analysis
At the time of this writing (7/11/2021), Zillow Ticker ZG is trading at $116.59 with a 52 week range of $56.30 - $212.40 and a market cap of $28.748B. In Q1 of 2021, Zillow’s revenue was $1.218B with 221 million average unique users and 2.5 billion website visits. Internet, media, and technology revenue grew 35% year over year to $446 million, and the Premier Agent revenue grew 38%. Homes segment revenue of $704 million continued to grow and the mortgages segment revenue grew 169% year over year to $68 million, driven primarily by refinance strength in their mortgage origination business. The return of equity (ROE: Net Income / Total Equity *100) of Zillow is 1.14%, the price to earnings (P/E) ratio is 509.13, and the Net Margin (Net Income / Revenue) is 1.55%. In the past year, the ZG stock has more than doubled in price, increasing from a low of $57.75 to its current value of $116.59. This financial analysis was done using financialstockdata.com (become a beta tester here). You can view ZG’s 2021 Q1 earnings here and their 2020 Annual Report here.
Qualitative Analysis
Zillow is the top e-commerce real estate company in the United States. It is estimated that $1.9 trillion real estate transactions take place every year in the United States. Zillow reports that in Q1 of 2021 the platform had 221 million monthly active users. A big pull to many of the active users is the Zestimate feature, which allows consumers to evaluate their homes using Zillow’s AI technology. This keeps users on the Zillow application after purchasing a home as 51% of homeowners are in their purchased home for 15 years or longer according to Yahoo!. In May of 2021, Zillow had 315 million users enter the website, an increase of ~59 million users (+23%) compared to December of 2020. The growing awareness of housing prices and the COVID-19 pandemic has made many Americans want to purchase a house or track the increasing price of their current home. Zillow is also becoming a platform where landlords can market, screen, and manage tenants. Zillow is also making a large investment in what they are calling Zillow 2, which represents Zillow Offers and Zillow Mortgage. This will allow users to not only browse for real estate deals but make Zillow a one stop shop for all things real estate by simplifying the home buying process. Zillow 2 has the potential to be a one stop shop for browsing, purchasing, and financing homes. With the large real estate market in the United States and the current housing shortage, more and more transactions will be facilitated with the help of Zillow.
Bullish Thesis
Here are three points to support the bullish thesis:
Largest Player in Real Estate E-commerce: Zillow is currently the largest player in the e-commerce real estate game and is owner of Trulia Real estate, another large player in the market. With the housing shortage and increasing prices of current houses, users will be actively checking the Zestimate price of their house or looking at current housing supply. Being the largest player in the already large real estate market in a growing e-commerce world is huge for the future potential of Zillow and can only mean that as real estate becomes more digital, Zillow will have a major advantage over its competitors.
Multiple Services: Zillow is becoming the one stop shop for all things ecommerce with real estate. Zillow was previously known for a real estate browsing site, but now it offers the ability to buy and sell properties, market and manage rentals, and is now working on becoming a wholesale/flip site and a mortgage broker that will connect you with a local lender. This will allow everyone involved in real estate to utilize the Zillow application for everything involved in the business. The more time spent on the application and the more visitors will create a network effect as well. Landlords using Zillow will have more tenants on the application and the amount of users on the platform makes it appealing for everyone involved in real estate to be connected to some portion of the platform, whether it's a real estate agent, buyer, seller, mortgage lender, landlord, or tenant. The increased user base can only benefit Zillow and its increased services will only create growth for Zillow.
Rapid Growth: Zillow is planning on hiring more than 2,000 employees increasing their total workforce by 40% in 2021 to help with their customers and partners.According to Zillow’s own Mover Report, indicated that the pandemic has caused people to rethink where they live. Zillow estimates that about 8 million existing homeowner households have been on the sidelines and they may enter a real estate market driven by high demand. Zillow is preparing for the increased demand and looking to grow their online marketplace to help with all things real estate related. This will help to support housing in 2021 and for the long term.
Bearish Thesis
Here are three points to support the bearish thesis:
Revenue Dependent on Housing Market: One of the most obvious risk factors associated with Zillow is its reliance on a strong housing market in the U.S. While long-term stability in the housing market is likely, short- to mid-term volatility coming out of the pandemic may cause fluctuations in Zillow’s revenue. With their recent expansion outside of a simple ad revenue model, Zillow increased its exposure to market conditions. Although this exposure is working in their favor at the moment, a post-pandemic crash may be on it’s way. Following the market crash in 08, both price and availability of housing dropped dramatically - two things that could severely impact Zillow’s revenue if they were to happen again. It’s unclear whether Zillow can withstand such drops in the future - particularly in their relatively early stages of development.
Relationships with Real-Estate Partners: Zillow relies heavily on established relationships with real-estate partners - particularly those willing to advertise properties on their platform. As market competition heats up in the online real-estate industry, Zillow will have to do its absolute best to keep their partners happy. To do so, Zillow will need to continue to show that they can bring customers to the individuals and companies listing properties on their platform. While their expansion into new territory (e.g., buying and selling properties on their own) signals a willingness to grow and adapt their business model, it’s important that Zillow doesn’t neglect their original service (marketing real-estate). Over the next several years, investors will need to keep an eye on Zillow’s ability to maintain its time-proven marketing service while expanding into new territory.
Susceptibility to Fraud: While it seems to be a relatively small concern, it’s important for investors to consider Zillow’s susceptibility to fraudulent listings. Over the last few years, there have been several reports of fraud. For example, in May of 2021 a Texas woman lost $5,000 on a fake rental posted on Zillow. In 2020, a North Carolina family lost nearly $2,000 when they agreed to rent a home on Zillow that was not owned by the listing party. In 2019, authorities in Hall County Georgia warned citizens of potential scammers using online rental and real-estate sites (including Zillow) after a series of reports. Zillow provides user guides on spotting and reporting fraudulent postings, but they will need to continue to develop its fraud detection process to ensure positive user experience and avoid potential legal liability.
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Have a great week everyone,
Brandon & Daniel
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.