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Z Stock: Zillow Taps Into an $11 Billion Real Estate Opportunity

The deal could have much potential for the long haul.


Over the years, real estate info provider Zillow (Z) has been adept at finding and expanding into various markets, such as rentals, mortgages and even home improvement. These efforts have fueled the company’s growth and Z stock, which is up 85% in the past year, including a nice 13% ramp in 2014.

zillow-z-stock-real-estateNow, Z stock could receive even more oomph, as Zillow is positioning to get a piece of yet another hot market — Chinese buyers of U.S. real estate.

Zillow has struck a partnership with Leju Holdings, a division of E-House Holdings (EJ) — the largest real estate firm in China. The company has a platform of local websites and mobile apps across more than 250 cities, and it also manages the real estate businesses for Sina (SINA) and Baidu (BIDU).

Leju is a fast-growing firm; revenues soared from $137.1 million in 2011 to $355.4 million last year, and the company went from bleeding $438.3 million to earning $42.7 million in those respective time frames. (As a note, Zillow lost $12.5 million last year on $197.5 million in revenues.)

Wall Street doesn’t seem too impressed by the deal, however; Z stock is only up fractionally today. And pause makes sense given that the deal won’t take effect until the summer, and even then it’ll need time to pick up traction. Cross-border partnerships usually take some doing; difficulties are part of the game.

But again, Zillow has a good track record in making things work out, as seen with deals with companies like AOL (AOL) and Yahoo! (YHOO).

More importantly, the target market here is enormous. According to Zillow’s own metrics, Chinese buyers accounted for more than $11 billion in U.S. real estate purchases, averaging $425,000 per home. And 69% of those purchases were all-cash.

Even with a recent slowing in China, the future still looks bright for wealth creation. Here are some notable data points from Leju’s S-1 (yes, the company has plans to come public in the U.S.):

  • Real estate investment in China went from RMB3.1 trillion in 2008 to RMB7.2 billion 2012. So it does seem reasonable that there will be more interest in offshore opportunities. And the U.S. does provide some important advantages, such as great locations, a stable legal and political system, and steady economic growth. Another key is that real estate prices in China have reached bubble-esque levels, making U.S. property look like a relative bargain.
  • The Internet is becoming a key way for Chinese buyers to access real estate information. According to iResearch, online advertising spending grew at a compound annual rate of 53.6% from 2009 to 2012 (reaching about RMB 3 billion).
  • Internet usage has grown at a torrid rate. Based on data from Euromonitor International, the number of Internet users in China climbed from 299 million in 2008 to approximately 570 million in 2012, representing a CAGR of 17.4%. Yet the penetration rate is still under 50%. But mobile is likely to be the biggest driver. The number of mobile Internet users is forecast to grow from 500.1 million in 2013 to 722.8 million by 2016, according to iResearch.

The Zillow-Leju partnership will include a co-branded site translated into Chinese. Zillow will manage the operation and also provide its extensive online assets like valuation data, home inventory, mapping and search capabilities.

And Leju will provide something extremely valuable: access to more 60 million users.

While the deal is no guarantee — hey, no deal is — it does make a lot of sense. Zillow’s strong presence in the U.S., which includes more than 70 million monthly average users, has allowed it to snag top partnerships.

Besides, if the company wants to keep growth and propel Z stock higher, it needs to remain aggressive with attacking new markets.

That means looking past the U.S. Sort of.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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