Zillow Is a Data Empire You Cannot Ignore

You probably think of Zillow (NASDAQ:Z) as a real estate platform but it’s much more than that, it’s an advertising monster too.

Zillow Group’s flagship app attracts over 220 million monthly users, which is little surprise when you take a look at its business model that generated half a billion dollars last quarter alone.

The company sits on a treasure trove of data with its Zestimate tool a huge popular magnet attracting users each month, and better yet, management claims its error rate is below 2% for on-market homes. That accuracy rate alone speaks to Zillow’s technological capabilities, especially when you consider the volume of homes tracked and its national coverage.

Indeed, Zillow’s use of data analytics for smarter decision-making represents a competitive advantage over traditional real estate companies.

Unlike most competing algorithms, the Zestimate tool incorporates localized real estate data in over 450 U.S. counties. The firm’s extensive local focus builds trust and credibility among users, making them more likely to return to Zillow and has produced close to $2 billion in annual revenues.

Another factor that separates Zillow from many competitors is its audience focus. Zillow’s platform isn’t limited only to home buying and selling but also extends its offerings to include rentals and new constructions. The expanded service range means Zillow can attract a whole segment of renters to its platform before they consider or can afford to purchase a home. 

Diversified Top Line

Beyond audience diversification, Zillow has built out a variety of revenue streams also. A couple of years ago it shut down one of its most hopeful initiatives, Zillow Offers, which facilitated home transactions.

Now interested buyers and sellers are referred to Opendoor if they wish to proceed with a purchase or sale. The pivot to actually buying and selling homes was fraught with inventory risks and the associated costs of holding properties.

That failure, however, was a sign that management endeavors to grow the business via non-traditional channels, and one that has worked well is advertising revenue.

Besides property listings, Zillow monetizes its huge user base by providing targeted ads to businesses related to real estate, such as mortgage lenders, property management companies, and home improvement services, which combine to diversify income and cushion against market downturns.

With that said, revenues have struggled over the past 3 years. Over the past 12 quarters, revenue growth was negative year-over-year in 8 of them. From quarterly revenues of $656.7 million in Q3 2020, the most recent figure sits at a comparatively poor $506.0 million.

Perhaps surprisingly in light of the choppy top line, operating income has been largely positive with 9 of the past 12 quarters reported in the black. Unfortunately, all 3 of those losing quarters came in the past twelve months.

Still, there’s lots to like about Zillow, not least it’s a data play at a time when data is highly valued.

Is Zillow a Play on Data?

Although to consumers Zillow is a real estate app, it’s as much a technology company to shareholders. The firm places a significant emphasis on data analytics with its vast repository home prices, consumer behaviors, and market trends providing it with a competitive edge over most rivals.

The fact that it can adapt to disparate geographies is a core competitive advantage, too. Zillow’s platform is structured to adapt to local market conditions with its Zestimate algorithms tailored to provide relevant estimates contextual to local real estate market conditions.

This in turn creates a virtuous cycle because the customization makes the platform more reliable and trusted among users, both of which are crucial for long-term growth.

So how does Zillow make money from all this data? The vast majority of it, approximately 94%, comes from its Internet, Media and Technology segment that generates income primarily from advertising revenue and connecting home buyers and real estate agents. 

Over the past few years Zillow has struggled to sustain top line growth but has generally impressed in its operational efficiency, but what does that all boil down to when it comes to valuation?

Is Zillow Stock Undervalued?

Although Zillow share price has plunged from a high of $55 per share in August to the mid-$30s now, the silver lining is that it may be a much more compelling investment opportunity.

According to the three analysts covering it, Zillow is undervalued by 52.4% with fair value sitting at $59 per share.

The caveat here is that only three analysts cover the stock, and a discounted cash flow forecast is undeniably more pessimistic, with intrinsic value sitting at just $39 per share, suggesting limited upside of just a few percentage points.

In December 2021, the Board of Directors authorized a share buyback scheme of $750 million when the share price was about 50% higher than where it sits today, so it would seem that the leadership team was optimistic about the firm’s prospects even then. Another way of viewing this is if insiders thought Zillow was a deal back then, it certainly appears to be a steal now.

Some caution is needed, though, before getting too enthusiastic because we cannot forget the choppy income statement over the past 4 quarters where operating income went negative in 3 of the past 4 quarters. So too has revenue really struggled to gain any meaningful traction.

Nonetheless, net income is forecast to rise this year and the company is cash rich with around $3.2 in liquid reserves against just $1.6 billion in long-term debt.

Is Zillow Stock a Buy?

When eyed through the lens of analysts covering the stock, Zillow appears to be an attractive buy now with meaningful upside of over 52%. However, a DCF forecast is much less optimistic, and places fair value just 1.6% higher at $39 per share.

In light of the firm’s choppy top line and increased struggles on the bottom line, it doesn’t stand out as a compelling investment opportunity at this time.

Still, the vast troves of data Zillow is accumulating daily cannot be ignored and offer monetization potential down the line, too, beyond the traditional lead generation and ad monetization channels.

For now, though, it seems the stock lacks sufficient drivers to attract investors to power the share price higher, even after its recent downdraft.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.