Share prices of real estate technologist Zillow Group (ZG -0.69%) (Z -0.46%) are up nearly 300% in the last year, boosted by a surprising housing market boom during the pandemic. Americans are moving, and Zillow is using the hay it's making to deepen its reach within an industry ripe for disruption.
Headed into 2021, uncertainty remains as it usually does in the housing market, but this is still a top real estate tech stock. Here are three reasons why.
1. Zillow's core business is rebounding
Zillow's primary money-maker has always been its website, which generates revenue by connecting home buyers and sellers with a real estate agent. More recently, rental listings, media, and advertising have also been included in Zillow's IMT (internet, media, and technology) segment. After dipping at the start of the pandemic last spring, IMT has come roaring back as American households have shown renewed vigor in moving -- especially out of the densest cities and into more suburban areas now that remote work is quickly becoming the norm for many people.
|
Period |
IMT Segment Revenue |
YOY Change |
|---|---|---|
|
2019 |
$1.28 billion |
6% |
|
Q1 2020 |
$331 million |
11% |
|
Q2 2020 |
$280 million |
(13%) |
|
Q3 2020 |
$415 million |
24% |
|
Q4 2020 |
$424 million |
33% |
Data source: Zillow Group. YOY = year-over-year.
The real estate market is cyclical. At some point, the surge in buying and selling activity will come back down to earth. However, it's noteworthy that in the last year, U.S. real estate has been marked by a supply shortage in homes for sale. This problem is persisting, although it bodes well for Zillow for the time being.
Constricted supply means buyers will continue their search for a new place to live -- and thus keep web traffic at Zillow high. Things can change fast (remember the coronavirus-related lockdown, and then the sudden reversal in economic activity last year?), but for now, Zillow's core business looks poised to continue its recent momentum.
Image source: Getty Images.
2. Zillow has the most developed complementary services
Zillow isn't just a real estate internet and media brand anymore, though. In recent years, the company has branched out into the direct-home-buying-and-selling business, a new segment of the market pioneered by Opendoor Technologies (OPEN -3.59%) and that discount broker Redfin (RDFN -0.74%) is also making some headway in. Zillow's "Home" segment revenue did fall 50% from a year ago to $304 million, but the company ended the year with 1,531 properties in its inventory compared to just 665 three months prior. Purchasing continues to rally after the economic freeze last spring, so this area is bound to improve through 2021 as more homes in the company's inventory get listed and sold.
On the value-added services front, Zillow Mortgages also made further advances and notched a 190% year-over-year increase in the fourth quarter to $61 million. Mortgages and other services critical to the purchase of a home are also being developed at Redfin and Opendoor, but Zillow has the lead in this department. It's a profitable complement to everything else Zillow does, and it could help smooth out core business results in the future during the inevitable downturns inherent in the real estate industry.
3. Zillow is a highly profitable company
Taken as a whole, Zillow ended up having a pretty good year. Total revenue increased 22% in 2020 to $3.34 billion, and adjusted EBITDA increased from a negligible amount in 2019 to a new all-time high of $343 million -- good for an adjusted EBITDA profit margin of 10%.
Opendoor and Redfin are smaller operations and aren't bogged down with the IMT segment that has been lackluster for Zillow in recent years -- at least up until the pandemic hit. Nevertheless, Zillow is still growing and is starting to reach a highly profitable scale. It also recently announced it will be acquiring tour scheduling software firm ShowingTime for $500 million (putting some of the $3.92 billion in cash and short-term investments it had on balance to work). This should help build out Zillow's online buying-and-selling business, especially the "Homes" segment that still operates at a loss.
All told, Zillow's profitability should continue to rise in the coming years as it leads the way in technological disruption of the real estate industry. Opendoor is still a long way off from reaching that kind of profitable scale, and Redfin is just now starting to turn that corner (at the moment, it's still my favorite real estate pick). Nevertheless, at 13 times trailing 12-month revenue, Zillow is a top real estate market stock for the years ahead. There will be bumps in the road, but this tech firm still leads the pack in bringing some much-needed transparency and simplicity to the home-buying process.
