Zillow Group ZG - JULY 1, 2020 - Cook Investment Research
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Zillow Group
Zillow Group
ZG
Entertainment Software /
General Real Estate
JULY 1, 2020
Cook Investment Research, LLC
1Zillow Group
Overview
Zillow Group operates the largest portfolio of real estate After purchasing the home, they do any small
and home-related brands on the web, which focus on all repairs or updates that add value to the home, and
stages of the home lifecycle: renting, buying, selling and then turn around and sell the home on their site
financing. within a few months. By selling the home quickly,
Zillow tries to avoid any of the long-term costs
Over 180 million users visit Zillow sites each month. The associated with owning a house.
company’s subsidiaries include Trulia, StreetEasy, HotPads,
and RealEstate.com.
Revenue by Segment
IMT (2024 estimate)
Zillow’s Internet Media and Technology segment consists of
Premier Agent, Rentals, and Display marketing. 3%
9%
Premier Agent was the largest contributor to sales up until
Offers. As a Premier Agent, users (real estate agents) get
placed on the side banners of the Zillow platform. In
addition, the company sends agents leads for interested
buyers, and only charges them if those leads get to a
certain point in a transaction.
Zillow Rentals includes all of the revenues generated
through rental property listings on various Zillow Group 88%
sites.
Offers IMT Mortgages
Mortgages
In late 2018, Zillow acquired Mortgage Lenders of America
(MLOA) to complement their real estate platform.
Management expects MLOA to be a large part of their
supporting sales in the future.
Revenue by Region
Offers
Zillow Offers is part of the large scale iBuyers movement
for residential homes. They use recent transaction data to
make an offer on a residential home.
How it works: First, a homeowner submits to Zillow that
they would like to sell their home. Within a few days Zillow
sends out one of their appraisers to examine the property.
Using their price algorithms, Zillow comes up with an offer. US
If the seller decides to go through with the offer, a Premier 100%
Agent will assist in the sale. For their service, Zillow
charges a 6-9% fee. The nature of the program also allows
them to pick up homes at a discount, compared to similar
homes in the area.
1Zillow Group
Short-Term Outlook
$80
ZG Shares
200 MA
$60
$40
$20
$0
2012 2016 2020
The current volatility in ZG shares can be traced back to their decision to join the iBuyer movement.
The main problem that investors had with Offers, was that management was shifting from an online
platform that had the potential for extremely high margins, to the very capital-intensive and low
margin business of “flipping homes”. In addition, the company needed to open a large credit line to
partake in the high volume of transactions they plan to do.
Consequently, when the pandemic hit financial markets, it hit Zillow especially hard. The residential
real estate market is directly linked to trends in consumer spending. With the unemployment rates
soaring above 20%, investors were rightfully concerned. What’s more, no iBuying company has yet to
weather a recession. It’s impossible to know how Zillow will perform when prices begin to revert,
and the company is stuck with a large inventory of homes.
Prior to the pandemic the company was also having problems with their IMT segment. Premier
Agents were concerned with a change in how they receive their leads, as well as the quality of those
leads. This change left many of their Premier Agents frustrated with the service. Although they have
since rekindled most of these broken relationships, management decided to completely change the
fee structure of the program. Rather than being based off an upfront, fixed-price system, Premier
Agent will now be lead-based. This program is called “Flex”, and even though it has been a hit
among agents, it temporarily pushed back some profitability targets.
3Zillow Group
Long-Term Outlook
Growth Estimates → 2025
Growth (Revenue) S&P 500: 5.84% Industry: -% ZG: 46.00%
Growth (Earnings) S&P 500: 7.19% Industry: -% ZG: 193.00%
IMT Segment:
Rentals has been one of Zillow’s fastest growing areas, growing at a rate of 30% year-over-year. Currently,
Rentals revenue stands at only $37.84 million, a number vastly smaller than the total $3 billion property
managers spend on marketing their rental properties each year.
When it comes to Premier Agent, the continued growth in unique user count is likely to push real estate
agents to join the program. Familiarity with Zillow is also highest amongst Millennials, who are now entering
their prime years of purchasing a home. In addition to the growth of unique users, Zillow can also now offer
agents the chance of a commission from their Zillow Offers purchases. This creates a huge incentive for real
estate agents to pay for Zillow’s services. Referral fees typically fall around 35% for the industry, but Zillow
may demand a premium because of their reach.
Offers:
Zillow Offers already receives a request for the service every 2 minutes. This means that every day the
company receives around $200 million in requests to purchase real estate. Within the next 3-5 years they
plan on buying approximately 6,000 homes every month. 6,000 homes per month equates to 72,000 homes
per year; generating an estimated $20 billion in annual revenues.
What’s more, the benefits of Zillow Offers extends into their other segments. For example, in their MLOA
segment Zillow sees the likelihood that they’ll be able to obtain a 33% attachment rate on their in-house
mortgages. Considering they’ll be flipping around 72,000 homes per year, they’ll be getting around $800
million per year in just origination fees for those mortgages.
The downside with offers, is that the company will be heavily invested (with their own capital) in the
residential real estate market. This creates an enormous risk that the company has yet to face. Other than
risk, Zillow Offers itself will not be generating much in the form of income. Net margin will probably fall
below 3%, and that’s with low interest rates. The real opportunity in Offers, comes from the company’s ability
to leverage the platform into other segments of their operations.
4Zillow Group
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