An Introduction to Zillow

Founded in the mid-2000s, Zillow (Z 1.68%) (ZG 1.70%) started as a website for listing homes for sale. The company successfully built an online advertising business where it sells leads to real estate agents and landlords. Zillow has recently started a business called "Zillow Offers," which has it directly buying and selling houses on its platform.

In this clip from Industry Focus: Energy, Motley Fool contributor Luis Sanchez and Industry Focus host Nick Sciple introduce listeners to the company and its product offerings.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on Sept. 5, 2019.

Nick Sciple: We're going to talk about Zillow today. Most of our listeners are probably familiar with Zillow, they know about the Zestimate. You can look and see how much your neighbor's house is worth, those sorts of things. It's really helped empower buyers during their home shopping process. They can know how much these houses are estimated to be worth. Luis, can you give us a high-level view of what Zillow's business actually does and how it makes its money?

Luis Sanchez: Sure. By way of background, the company was actually founded back in 2006 by Rich Barton, who also founded Expedia and Glassdoor, and another guy, Spencer Rascoff, who is the guy that founded Hotwire. Barton and Rascoff are still involved with Zillow and actually still own a lot of the company. When they started Zillow, it was basically a website where people could list their homes for sale or for rent. Their big idea was simply to make money on advertising, either through display advertising or by partnering with real estate agents and landlords. What's developed is basically their bread and butter business, which they call Premium Agent. That business is basically Zillow selling leads to real estate agents and landlords. The way it works today is, if you're looking to buy a home or move into an apartment, you go to zillow.com and research prices, research your neighborhoods. You might see something you like. Your next impulse, obviously, is, "How do I contact the buyer?" Very handily off to the side, there might be an advertisement for an agent that covers that zip code that could actually help you broker that transaction.

Sciple: Right, and that agent has paid money to Zillow to be there, which has been the foundation of that core business. It's matching these buyers that are looking for properties with these agents that have paid Zillow to be up there. When you take a look at how that business has performed over time, are they dropping profits to the bottom line? How well has that business performed since Zillow has gone public?

Sanchez: Growth-wise, it's done really well. Since they IPO'd in 2011, revenue has something like 30X-ed. That Premium Agent business, that advertising business, is still technically unprofitable, but it is cash flow positive to the company. Big picture, if we're looking at the company today, it's basically the website for conducting research on buying a home. It's clearly built a very valuable platform. Something like 200 million unique visitors per year on its website, over 100 million homes in its database. A couple of years ago, it acquired Trulia, so now it owns the two most popular home real estate websites.

Now, the company has been trying to figure out what's next. They've already built this great advertising business. The growth in that business has slowed lately, but they've accrued a lot of value to their platform, and a lot of traffic. This is where the story gets interesting. Now, Zillow is essentially taking another step -- back in 2017, it started testing out this marketplace platform where third parties could get on Zillow's website and use its platform to actually directly buy and sell homes. Earlier in 2018, Zillow actually took it another step further and launched this product called Zillow Offers, where now Zillow will actually directly itself buy homes and then sell them on its platform. It started small. Zillow Offers was just in a handful of markets last year. But it's been pretty quickly ramping up. The company expects to be in about 26 markets by mid-2020.