We’re adding a new, powerful, under-the-radar, growth stock to our watchlist. This is a company that has sold-off hard in recent months despite the fact that its business is getting MUCH more attractive. Somewhat ironically, it’s the market’s inability to correctly process this company’s vastly improved business model that has caused the stock to sell-off, thereby making it even more attractive. We haven’t hit the buy button yet, but we have a very itchy trigger finger on this one.
Zillow Group, Yield: 0.0%
This may not strike you as a powerful, under-the-radar, growth stock, but let us explain. Zillow Group is in the business of real estate and home-related information marketplaces on mobile and the web. And the company’s business was doing just fine, but management recently took steps to begin unlocking one of the most important ingredients in creating a powerful growth company: An enormous Total Addressable Market (“TAM”). Let us explain further…
Zillow’s business was doing just fine, by simply addressing the large ($87 billion, and growing) real estate agent commission market in the US, especially considering Zillow is just a small percent of that market (less than 8%) and considering Zillow has been growing faster than the market. However, Zillow has dramatically expanded its long-term TAM by creating its new “Homes” segment, an initiative to buy and sell homes on the open market.
Specifically, “Zillow Offers” has been launched, whereby the company has started buying houses directly from homeowners (Zillow has thus far purchased 19 homes through Zillow Offers). And when Zillow Offers launches in Denver in the fall of 2018, it will become the fourth market where Zillow will directly buy homes, prepare them for sale, and list them for sale in its expanded test of Zillow Offers (Denver, Phoenix, Las Vegas, and plans to expand to Atlanta).
The most amazing thing about Zillow Offers is its ability to disrupt a truly enormous TAM. For perspective, here is a look at the TAM of Zillow’s existing business ($17B) and the TAM of its new Homes segment, “Zillow Offers” ($1.8 Trillion)
And the reason Zillow is able to disrupt this enormous marketplace is because (a) many people believe real estate agents are dramatically over paid for what they do, and (b) Zillow group is already the leader in the relevant real estate market information space (Its brand portfolio is comprised of Zillow, Trulia, StreetEasy, HotPads, Naked Apartments, RealEstate.com, and OutEast.com. It also houses the business brands Mortech, dotloop, Bridge Interactive and New Home Feed.).
Wall Street Analysts Are WAY Too Short-Sighted, As Usual…
Zillow’s share price (and valuation metrics) have recently dropped significantly (as shown in the following graphic) because Wall Street analysts are WAY too short-sighted, as usual.
For example, Zillow recently announce the acquisition of Acquired Mortgage Lenders of America (which will allow Zillow to streamline and shorten the home-buying process for consumers who purchase homes through Zillow Offers), and the market freaked! Specifically, the shares sold-off because the company’s decision to spend on growth caused it to miss short-term Wall Street expectations. Here is a look at the recent share price action and Wall Street analysts earnings revisions (they lowered their notoriously short-term price targets).
Attractive Inside Ownership:
Another thing we really like about Zillow is the high level of inside ownership (currently 13%, of this $9.3 billion market cap company). Specifically, the company was founded by Richard N. Barton and Lloyd D. Frink (former Microsoft executives, and founders of Microsoft spin-off Expedia), and they still own 5.78% and 3.84% of the shares, respectively.
High inside ownership is another one of the ingredients (in addition to a large TAM) in the making of a powerful growth company.
Wait Until You See The Whites of Their Eyes!
There is an old military saying: “Don't fire until you see the whites of their eyes.” This basically means, hold your fire until it will be most effective. With regards to Zillow, we’d like to see Zillow’s price (and earnings surprises) moving in the right direction (up) before we hit the buy button because we want to make the most effective use of our capital. Specifically, we believe Zillow has enormous long-term upside potential, but it is not entirely clear to us when the market will realize this, and we don’t want to be in the position of deploying our capital to Zillow, and then waiting for many months for the market to start giving it the credit it deserves. Nonetheless, market timing is extremely difficult, and we may begin initiating a position in Zillow soon. We’ve added it to our watch list for now. Stay tuned!
For reference, if/when we do buy shares of Zillow, it will be in our Disciplined Growth portfolio. You can view our current holdings here.