Zillow Looks Poised to Grow With Its Diverse Offerings
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Zillow (NASDAQ: Z) has quickly become the market leader in the online real estate market. Although the stock has gained 74% YTD we believe that there is still a considerable room for improvement as Zillow increases its market share in the $8 billion real estate ad market. With Zillow just starting to pay attention towards mortgage advertising, rental advertising and agent marketing services, we believe that Zillow is aiming at an additional market opportunity in excess of $12 billion and therefore rate this stock as a buy.
Monetizing the “third slot”:
Zillow used to feature two paying premier agents (PA) on the search results page while the third slot was devoted for a third realtor who was an active Zillow user for free. Now Zillow has changed its monetisation strategy and started charging market rates for the third slot as well. We believe that this website change has the potential to add incremental revenues per zip code and hence could generate high revenues in the coming quarters.
Source: Company Website
Pricing power in Premier agent:
We believe that the investor’s concern about Zillow running out of inventory of PA slots is misplaced. There are around 43,000 Zip codes in the US. Assuming that 30,000 Zip codes are valid targets and Zillow sells 8 slots per zip code, Zillow has a total inventory of ~240,000 PA slots. The company currently has ~19000 PA subs and assuming 2 slots per PA sub, Zillow has currently sold less than 40,000 of the total slots or around 1/6th of its inventory leaving ample opportunity to increase revenues.
Mortgage Marketplace to provide upside to revenues:
In the Q1 earnings call Zillow’s management disclosed that it had processed 2.5 million loan requests in Q1. Assuming that Zillow processes ~10 million loan requests in 2012 and revenues of $2-3 per loan request we estimate the revenues for mortgage marketplace in the proximity of $20-$30 million for 2012. We believe that the Mortgage marketplace has the capability to provide substantial revenue upside for Zillow in the coming years.
Launch of premier agent web sites:
Zillow recently announced the launch of premier agent web sites which allows real estate agents to quickly and affordably create a custom WordPress powered website for their personal brand and business. The company currently charges $10 per month for this offering from agents who are not currently subscribed to the user base while provides this service free to premium agents. Given that thousands of agents have their profile set up on Zillow, this service could quickly gain traction and may bring high incremental revenues in 2012.
Concern over reliability of Zillow data feeds unfound:
There has been a growing concern from investors towards the reliability of data feeds that Zillow provides to the users on the site. We believe there is little practical risk as far as data feeds are concerned. Zillow currently obtains the data from multiple data providers including brokers, local government, large home builders and other vendors. Keeping in view the diverse nature of data sources dependence on any one is limited reducing possible risk of data shortfall. The company also validates and harmonizes the data to provide impressive presentation of information to customers.
Zillow is the market leader in the rental business with Move’s (NASDAQ: MOVE) Realtor.com trailing far behind and looks poised to consolidate its position further with its diverse offerings and multiple data sources. Zillow recently became an exclusive provider of rental listings on Yahoo (NASDAQ: YHOO) homes which gives its property managers increased marketing opportunities. As Zillow is looking to create new opportunities and capitalize on the existing ones we are confident about its future and therefore rate this stock as a buy.
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