Why Zillow Will Get Better

Shazir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Most of you have probably been to Zillow.com, a website that provides a “Zestimate” or a Zillow (NASDAQ: Z) provided estimate for homes. This service that Zillow provides covers over 100 million homes, townhomes, and condominiums. Zillow does this by operating a unique website and marketplace that is available on the web and on mobile devices. At first, I believed that Zillow was just another technology company that experienced a late boom, but I was wrong.

For many years now, Zillow has been fiercely debated in the real estate world because there are mixed views regarding the “Zestimate” that Zillow provides. Some agents complain that it provides inaccurate listings, while others recognize Zillow as a giant forcing them to buy expensive listing contracts. Even though there have been numerous complaints, Zillow has not failed to attract hordes of people, investors, and clients to its extraordinary database. In fact, Citadel recently took a large stake in Zillow.

Below, I will outline why I feel that Zillow is bound to skyrocket. I will also outline why its competitors are of no competition to it. 

Growth

In Zillow’s latest earnings release, management stated that they were raising revenue guidance from $165 million to $182 million while consensus was just over $172 million. This is good, but the problem was that advertising led to the increase in revenue which would affect profitability and margins.

During the quarter, 46.6 million unique users came to the site, up 46.7% from 31.7 million users in the year-ago period and up from 34.5 million in the previous quarter. The company reported much higher earnings which pleased investors and Wall Street.

The main reason for Zillow’s growth is the fact that it provides it users with multiple tools such as historical pricing, tax information, and multiple photos of the interior and exterior.

Zillow has finally started to tap into the rental property market. For many years, Zillow was focused on just the residential market, but that has changed. Recently, Zillow acquired a company known as HotPads; Zillow should now have a ton of variety in its portfolio as it now has millions of rental properties at the tip of its fingers.

Valuation

When basing Zillow’s valuation solely on its earnings, it would be overvalued. However, earnings are growing rapidly and the market size is extremely large. Zillow currently has about 2% of real estate agents registered with it; however, this can change quickly as real estate agents spend roughly $6 billion annually on advertising. According to Zillow’s current valuation, you could easily determine that Zillow is overvalued, but as you analyze further, the larger picture becomes clearer.

Competitors

Zillow has a couple of major competitors -- Trulia (NYSE: TRLA) and Move (NASDAQ: MOVE). Both these competitors possess unique qualities; however, they are still no match for Zillow.

Like Zillow, Trulia also specializes and runs an online residential real estate site for home buyers, sellers, renters, and real estate professionals. Trulia is the biggest competitor of Zillow. Even though it is the biggest competitor, it still isn't bigger than Zillow. Trulia currently has approximately 22 million unique monthly users. This is pretty small when compared to Zillow’s 46 million.

Another major player in this online space is Move. Move is the founder of Realtor.com, most of you probably did not recognize its parent company. Likewise, Move is in the same industry as Zillow and Trulia, but only has 15 million unique monthly users. The only reason why I don’t like this stock is because of its low monthly users. Its subsidiary, Realtor.com, simply does not have the unique monthly user flow that the others have to offer. However,  I still rate this company as a buy after Zillow because it has the correct fundamentals and cash for long-term growth.

Conclusion

I believe that Zillow will continue to exceed all revenue and consensus estimates as it approaches 2014. Zillow has plenty of growth ahead of it as it expands in to the rental property area. It will also continue to grow its unique user database. Zillow has everything it needs to increase its market capitalization, mobile traffic, revenue, and advertising.

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Shazir Mucklai has no position in any stocks mentioned. The Motley Fool recommends Zillow. The Motley Fool owns shares of Zillow. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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