Zillow Group (NASDAQ:Z)(NASDAQ:ZG), has been on a rollercoaster ride in 2019 as investors question the scalability of its homebuying and selling initiative, Zillow Offers. While it's outpacing revenue expectations, its profitability has come under intense scrutiny; the segment loses $0.25 for every dollar in revenue it brings in. However, the demand for Zillow Offers cannot be ignored, and the long case for Zillow is a broader story. As Zillow Offers grows, Zillow will not just be flipping houses. It stands to become the largest online real estate marketplace in the US. 

A couple browses for a home online using a tablet.

Zillow's Offers service stands ready to capitalize on a wave of new homebuyers. Source: Getty Images.

How Zillow Offers digitizes homebuying

In Zillow Offers, the company goes directly to consumers and makes cash offers for the sale of their homes. With just a few clicks and a few days' time, sellers can go from initial request to a sold home. In just over a year, Zillow has grown the division to over a $1 billion annual run rate. While Offers comes with some challenges -- managing home repairs, sensitivity to interest rates, and turning over an inventory of homes -- management believes they can reach adjusted EBITDA margins of 2% to 3% of each home transaction at scale. 

So what's considered scale? About 60,000 transactions a year, equating to about $20 billion in revenue. This would make up just 1% of the overall market -- a target Zillow is confident in reaching. Considering that it has a current $1 billion annual run rate, plans to more than double the number of markets serviced in 2020, maintains an overwhelming web presence, and enjoys a roughly 35-to-1 ratio of requests for cash offers to homes purchased, it is very likely that Zillow will hit that $20 billion revenue target in five years.

But with such narrow margins, why get into this business? Zillow is betting on catching a new wave in changing demographics. Its data suggests the millennial homebuying boom is about to begin. The number of Americans reaching or surpassing age 34 (the US median homebuying age) over the next 10 years will increase by 7.4%, as compared to the last 10 years. In addition, job turnover for millenials could amplify the trends of real estate transactions for a generation.

The big picture

Investors looking at Zillow Offers in a silo are missing the big picture. For Zillow, the strategy is to get to mass market first, build brand loyalty, and gain the trust of consumers when it comes to online real estate. Once consumers trust Zillow to sell their homes, Zillow gains an opportunity to branch out into all ancillary real estate services, including title, escrow, and mortgage lending -- a more comprehensive market opportunity. As its inventory of homes grows, its media and advertising revenue should accelerate as Zillow stands to become the first touch point for people browsing the web for homes to buy.

By many metrics, there is a strong case to make that Zillow is on track to become the leading marketplace. Zillow currently dominates web traffic among real estate sites. As more people buy, sell, and search for homes online, Zillow's presence is overwhelming. Keep in mind that Zillow owns Trulia, StreetEasy, and Hotpads, among others. 

Zillow holds the top two real estate websites when ranked by monthly unique visitors, according to Statista. It also boasts three of the top 10 sites, amounting to about 50% of online monthly unique visits by those ranked.

The early data suggests that Zillow Offers can't keep up with the demand for its services. In the second quarter, Zillow sold 786 homes while purchasing 1,535. Meanwhile, the number of seller requests coming into Zillow was more than 69,000 in Q2. For Q3, Offers bought 2,291 somes, sold 1,211, and garnered more than 80,000 homeowner requests. That high demand should allow Zillow to be selective in its acquisitions through a period of rapid growth. Zillow Offers plans to enter 26 markets by mid-2020, and it's opening up to Los Angeles (the second largest housing market in the US) this quarter. 

A map of Zillow Offers' current markets throughout the U.S.

Source: Zillow.

Own the leader in web-based real estate

Even rivals who entered the this particular race before Zillow find themselves falling behind. Zillow's primary competitor, Redfin (NASDAQ:RDFN), launched its homebuying and -selling product Redfin Now in 2017 -- a whole year before Zillow Offers. But in Q3, Redfin Now booked segment revenue of $80 million, compared to $385 million for Zillow Offers over the same period. 

That's the power of Zillow's web presence, which should allow the company to grow market share exponentially. While Zillow Offers came a year later, it has quickly expanded to 21 markets, while RedfinNow was active in only 10 markets by Q3. 

On the web, Zillow saw 2.1 billion visits for the quarter across platforms, a 14% year-over-year increase. When considering its average of 196 million monthly unique users compared to Redfin's total monthly average visitors of 37 million, Zillow is a relative giant. Redfin does not have the recognition to keep pace.

Zillow Offers is not just some garage-based fintech start-up. This market is about to see a generational change, and Zillow could likely lead that market as people move to transacting homeownership online.