Will Zillow Zoom?

It's quarterly earnings season, and real-estate-cum-tech company Zillow (Nasdaq: Z  ) will be strutting its stuff next week. Investors are eager to find out whether Zillow has managed to maintain its stellar growth since its IPO a year ago. Let's see what this dot-com has been up to and whether it's about to have its bubble burst.

Quick history lesson
Zillow.com launched in 2006 with the intention of becoming the "leading real estate information marketplace." When the housing bubble burst just two years later, many thought Zillow would be another small-time casualty of a multitrillion-dollar recession. In reality, this real estate dot-com turned out to be a diamond in the rough, creating transparency and accessibility in a market shrouded in skepticism.

There's gold in them hills
Zillow has two main revenue sources. Display revenue consists of advertising space on Zillow.com and its increasingly popular mobile applications.

Marketplace revenue is Zillow's crown jewel, pushing it past the monetization woes of ad-based companies such as Facebook. Through its "Premier Agent program," Zillow offers tiered subscriptions to real estate agents that help them connect with potential customers and effectively manage their business.

In addition, Zillow manages a "Mortgage Marketplace," where mortgage lenders advertise their rates directly to consumers.

Over the past three years, sales have increased threefold, in large part because of booming marketplace revenue.

Source: author; data from Zillow 10-K.

The "eBay of Real Estate," Zillow has a relationship with both buyers and sellers that helps it benefit from an ever-expanding network effect. "Buyers" (homebuyers, renters, or mortgage seekers) head to Zillow because the "sellers" (home sellers, landlords, real estate agents, and mortgage lenders) are there, and vice versa.

This feedback loop isn't just an idea; it's supported by hard numbers. For every one of the past three years, Zillow has attracted one real estate agent for every 2,000 visitors. How you like them correlations?

Source: author; data from Zillow 10-K.

Competition-proof?
Zillow knows it's up against competition as both a tech and real estate company. Move (Nasdaq: MOVE  ) is an old-time real estate tech player and owner of the official site of the National Association of Realtors. Its sales have been falling for the past five years, though, and its website is … well, it's not Zillow.com.

HomeAway (Nasdaq: AWAY  ) dominates the online vacation-rental business and could become a worthy competitor if it ever decided to delve into "permanent vacations." It currently hosts 35 websites in 12 languages, many of which bear an uncanny resemblance to Zillow.com.

Surprisingly, Google bowed out of the online real estate market in February 2011, citing low usage and "the proliferation of excellent property-search tools on real estate websites." One can only wonder whether Zillow's recent success will have it back in the ring in the future.

To keep competitors at bay, Zillow holds three patents protecting its housing valuation algorithms and has 11 more pending. It's also acquired two companies, Postlets and Diverse Solutions, to enhance its listing service and marketing tools for its real estate agents.

Will Zillow zoom?
Zillow's not counting on network effect alone to keep it moving forward. In the past year, it's been expanding its mobile presence by adding new features to its iPhone app and launching new apps for both Androids and BlackBerrys.  In December 2011, app users viewed nearly 100 million homes on their smartphones.

Zillow is also creating strategic partnerships with larger online companies such as Yahoo! and AOL. Zillow now enjoys exclusive rights to sell real estate agent ad space on Yahoo! Real Estate and has brought its Mortgage Marketplace to AOL Real Estate (and AOL-owned DailyFinance).

As an investor, I can't help getting excited by Zillow's prospects. The company posted profits for the first time in 2011, and all indicators show that it'll keep growing until it's at the top of the $6 billion real estate advertising market. I've made a CAPScall and a real-money investment in Zillow. Regardless of what happens this next quarter, I'm in for the long haul as Zillow continues to disrupt the horribly inefficient and opaque real estate world.

Beneath it all, Zillow's success rides on its ability to gather and manage excellent housing data. Data mining is changing the way companies analyze their business, and there's one corporation out there that's miles beyond its competition. The Motley Fool has prepared a special free report outlining everything you need to know about this profit-pulling stock. It's as free as this article, so grab yours today!

Fool contributor Justin Loiseau owns shares of Zillow and once spent three weeks on couches in NYC trying to find a place to rent. You can follow him on Twitter, @TMFJLo, and on Motley Fool CAPS, TMFJLo.

The Motley Fool owns shares of Zillow and Facebook. Motley Fool newsletter services have recommended buying shares of Zillow, eBay, Facebook, and HomeAway. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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