Should I Buy Zillow Stock? 3 Pros, 3 Cons

Zillow (Z) stock gained in early trading Wednesday as third-quarter earnings beat expectations. By noon, though, Z stock had reversed course and was sitting more than 3% in the red.

Zillow revenues continue to grow at a rapid pace while losses pile up. In a heated battle with Trulzillow stock z stockia (TRLA) for the attention of homebuyers, the company is focusing on growing market share rather than achieving profitability.

Zillow stock investors are being asked for patience as Zillow executes its big-picture business plan. And so far, they have been more than patient. Z stock has soared over 185% year-to-date even with today’s slight downturn.

So should you snatch up Z stock? Here are the pros and cons.

Zillow Stock Pros

Market Share. Zillow is building its business much like Amazon (AMZN) did (and to a certain extent still does): eschewing profits for market-share dominance. In the third quarter, its market share among real estate websites was 34% — 7 percentage points higher than at the end of 2012. Pacific Crest Securities analyst Chad Bartley wrote in a note to clients prior to yesterday’s earnings that ” Zillow’s brand awareness continues to grow … it’s winning the mind-share battle with consumers.” That’s good news for Zillow stock long-term.

StreetEasy. Z acquired the No. 1 brand in New York City in August for $50 million. With over 1 million monthly unique users, StreetEasy gives the company a huge advantage in the nation’s largest real estate marketplace. It’s also a small price to pay for such an important market. Trulia finds itself behind the eight ball at this point; the only hope for TRLA is if it can capture either the Los Angeles or Chicago market. It might take one of them, but both is highly unlikely given the Zillow market share advantage with real estate agents.

Mobile. CEO Spencer Rascoff likes to remind Zillow stock investors that real estate agents spend upwards of $10 billion annually on advertising to generate something like $60 billion in commissions. Zillow’s run rate for real estate agent revenue is around $130 million, or less than 3% of what agents spend on advertising annually. That means there’s plenty of room fpr Zillow and Trulia to grow — and for Z stock and TRLA stock. Plus, while Zillow earnings reports don’t breakout its revenue from mobile, Z does reveal that 60% to 70% of its visits are on mobile devices and that number is doubling year-over-year … so you do the math.

Zillow Stock Cons

Losing Money. Conservative investors will have a hard time betting on Zillow stock because of its business plan. In the first nine months of 2013, Z posted an operating loss of slightly less than $20 million on $139 million in revenue. While its revenues in the first nine months increased by 69% year-over-year, Zillow expenses jumped by 106% thanks to a significant increase in headcount related to its sales team as well as user acquisition costs. And these costs, as Rascoff points out, aren’t likely to abate until sometime in late 2014 or early 2015. So Z stock investors shouldn’t expect a profit anytime soon.

Limited Revenue. In the Q3 Zillow earnings conference call, CFO Chad Cohen said 2013 full-year revenue would be at least $194 million, up 66% from a year earlier. Assuming Z grows at the same pace over the next five years, Zillow’s revenue at the end of 2018 would be $2.4 billion. That’s a big number to be sure. But ask yourself whether this is remotely possible for Zillow, given the economy in which we find ourselves. Oh, and in the past three fiscal years (assuming 66% growth in 2013), Zillow revenue has increased 120%, 77% and 66% year-over-year, respectively. The trend is slowing — which is worrisome for Zillow stock. Cut that growth rate in half and Zillow’s 2018 revenue of $807 million isn’t nearly as enticing.

Valuation. Zillow stock is currently trading for about 19 times revenue … and it’s not going to make money for another year, possibly two. In the mean time, you could buy Sturm, Ruger & Co. (RGR) for less than 3 times revenue, providing almost $5 per share in earnings and $2.60 in annual dividends. Of course, the RGR top line isn’t growing nearly as fast, but the comparison does point out that Zillow stock is exceptionally frothy at the moment. Only if you’ve got the long-term vision of someone like James Packer should you be tying a big part of your portfolio to the Z stock wagon.


In the end, Zillow stock looks a lot like Amazon stock … and that’s not a bad thing.

For the longest time, critics of Amazon said it couldn’t make money. Jeff Bezos and company focused on building the business deep and wide spending a bundle in the process. Today, it’s once again forsaken the almighty profit in order to further invest in its business.

Looking 10 to 15 years down the road, past experience tells Amazon management the short-term sacrifice is worth it. Amazon stock has achieved an annualized total return of 21% over the past 15 years. It’s hard to argue with success.

I see the same sort of thing from Zillow stock. It’s clearly not going to be another Amazon but with big-time investors like James Packer buying Z stock heavily at these frothy levels, it does suggest its future is bright indeed.

So if you want to make a lot of money in 3 to 5 years, buying Zillow stock is a smart move.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities. 

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