Why Zillow Is a Top Long-Term Buy

Zillow Group (ZG -0.69%) (Z -0.46%) announced second-quarter earnings on August 5. Despite strong growth, investors responded by selling the stock. It's now down 24% for the year and almost 50% from its all-time high, which represents a great opportunity to buy this transformative technology company for the long term. 

Consumers who have been priced out of buying a house recently are likely aware of the red-hot real estate market raging across the U.S. A combination of low interest rates and a shortage of family homes has sent prices soaring, placing enormous pressure on first-time buyers. 

Zillow presents a two-fold opportunity. Since it directly buys and sells homes (which is the largest source of its revenue), it offers investors unique exposure to growth in the housing market. But it's also a revolutionary slice of the future as the real estate world trends increasingly toward digitization, so it might be time to swoop in and capitalize while the stock is down.

The Swiss army knife of residential real estate

Zillow is a group of nine brands that cover almost every aspect of buying and selling houses. The only thing that isn't part of the business is the traditional agent, which the company has instead chosen to empower through its Premier Agent platform. 

Image source: Getty Images

Premier Agent is a software as a service (SaaS) tool which allows brokers to advertise their services on Zillow, generate leads, and manage their workflow. While the company doesn't hire any brokers of its own, this segment is its second largest by revenue.

Zillow's focus is truly on the digitization of this complex industry. It doesn't want to offer an experience similar to what a real estate agent might provide; it wants to buy houses directly from consumers to cut out the long and arduous sales process entirely. But for those who want to try their luck in the market, the company brings them online with an opportunity to sell their home themselves (with lower fees and commissions).

If buyers need mortgages or title and escrow services, Zillow can cover all of that in-house, too. By leveraging technology to offer all of these services, it's able to do what most traditional agents have struggled to do: Build national scale. 

Where an agent can only sell a limited number of houses, Zillow uses tools like artificial intelligence to maintain its database of housing-market conditions, driving thousands of transactions every quarter.

The iBuying revolution

Selling a house to Zillow is pretty simple. Any willing party can jump on the website, type in their address, answer a few questions, and within days receive a "Zestimate." If it's satisfactory, the company conducts a free in-person evaluation, and if both parties agree, it will make a cash payment to close the deal.

The savings in stress alone make it an attractive proposition. The seller doesn't need to conduct any repairs or host open houses, and can set their preferred closing date to move out at a time convenient to them. 

And it's popular, with 8,258 homes sold directly to Zillow over the last 12 months alone.

Data source: Company filings 

Revenues in this segment have more than quadrupled since the third quarter of last year. While part of that increase is due to the booming housing market, it's clear consumers have warmed up to this high-tech process. 

Why you should buy it

The Zillow Offers (iBuying) segment made up 59% of total revenue in the second quarter, but taking a broader view puts the company's overall growth in perspective. 

Data source: Company filings 

Analysts expect Zillow to deliver $5.5 billion in revenue in 2021; based on the first half, it looks to be on track. But more importantly, it's expected to be profitable, which was a lesser priority in the past as it invested heavily in building the business.

The stock currently trades at 100 times the 2021 expected $1.04 in earnings per share (EPS). While that's expensive, analysts are anticipating almost 40% growth in 2022, which would shrink the multiple significantly. 

Zillow should be viewed as a long-term play on a rapidly changing real estate industry. The total value of all homes in the U.S. is approximately $36.2 trillion, and that's a significant addressable market that for the first time can be captured by a scalable, transactional housing business.

For patient investors who can tolerate market gyrations, there's enormous long-term value here.