It's not often investors get the opportunity to buy a disruptive, profitable technology company at a steep discount -- especially when full-year projected earnings growth is in the double-digits. Zillow (ZG 1.88%) (Z 1.65%) has digitized the home-buying process for consumers, and it has benefited from the stay-at-home economy triggered by the pandemic. But there are signs this shift in the status quo is likely to stick around. 

Home prices have had an exceptionally strong year, thanks to record low interest rates driving demand, combined with supply shortages limiting options for buyers. Despite questions about how long these market conditions will hold, recent data suggests home prices are accelerating at the fastest pace in 30 years. It's a development set to benefit Zillow in a big way, and that means the nearly 50% fall in its share price might be a great chance to buy the stock. 

Two people hugging, one holding new house keys, in front of moving boxes.

Image source: Getty Images.

The supply and demand imbalance

The U.S. is currently facing a housing crisis in the form of crippling shortages, shutting many first-time home buyers out of the market. It's estimated that right now, supply is 5.5 million homes short of meeting demand, according to the National Association of Realtors.

Considering home builders produce around 1.2 million to 1.5 million units per year, the pinch is likely to persist for several years -- which is especially concerning because single-family homes make up 36% of the shortage. There is a risk that young couples delay their plans to start a family or cancel them completely, which would be a devastating blow to the economy in the future.

The imbalance has grown so bad that the monthly supply of houses recently hit its lowest level since 2003 (the all-time record low), but it has ticked up slightly since then. According to the University of Michigan survey of consumer sentiment in May, just 44% of Americans think now is a good time to buy a home, which is down from 58% at the same time last year when we were in the deepest part of the pandemic. Demographically speaking, respondents aged 18 to 44 years old were the most pessimistic. 

For Zillow, these tight conditions might be very beneficial as a healthy amount of demand will likely persist for several years to come. The risk, though, is that younger buyers (who are more likely to adopt new technologies) are priced out of the market. But so far, this hasn't shown up in the company's revenue or earnings, which continue to power ahead. 

Zillow's digital advantage

When it comes to buying and selling residential real estate, Zillow is like a digital Swiss army knife. With nine businesses under its umbrella, it covers almost all of the angles, including mortgage lending, sales agents, and even a rental marketplace. As displayed in many industries, building online solutions can deliver incredible scale, which means Zillow has a bigger potential footprint than any traditional player in its areas of operation. 

The company will even take your home off your hands through its Zillow Offers segment. In a typical market, selling your home can take months and involve endless inspections and uncertainty before finding the right buyer. Zillow eliminates all of that -- it will buy your home directly with the goal of reselling it for a profit. The offer you receive might be lower than what you could get in the open market, but it's clear many sellers will sacrifice a bit of the selling price for speed and certainty as the segment generated $701 million of revenue in the most recent quarter.

If you prefer to sell the traditional way, Zillow has that covered too. It will connect you with the right agent in your area (who might also be serviced by Zillow Premier Agent, which helps generate buyers) or even help you sell your home yourself, online.

Investors have taken a liking to this business model, sending the stock up over 300% since the pandemic lows set in March of 2020. Given the company's financial performance emerging from the pandemic, it's likely these digital trends are sticking. 

The valuation story

Much of the argument for avoiding Zillow shares centers around the valuation. The company has generated $1.05 per share in trailing-12-month adjusted earnings, which puts the stock's multiple at 105. Compared to a multiple of 38 for the broader Nasdaq 100 index, Zillow looks really expensive. But it's growing rapidly and has an enormous addressable market.

The consensus earnings estimate for 2022 is $1.44 per share. That would shrink Zillow's current multiple down to 77, assuming its share price remained the same. While still high, earnings growth of 40% compounds really quickly, so the valuation becomes less extreme looking out just a couple of years. 

And that's assuming the company doesn't beat current forecasts, which is a real possibility given strong demand in the housing market that is slated to persist. Since the company is already profitable, some investors might be inclined to bet Zillow will exceed expectations, and if they're willing to hold for the long term, they might just do incredibly well.