Zillow Stock Could Skyrocket If It Meets $5 Billion Expectations

In this clip from "Real Talk" on Motley Fool Live, recorded on Feb. 11, Motley Fool contributors Matt Frankel and Jason Hall analyze the real estate giant's bold revenue projection and discuss whether it's achievable and if now is the time to buy.

Matt Frankel: Zillow (ZG -0.86%) expects, and this is a bold claim, and here's really where I want to get your take, Jason. Zillow says they expect that IMT business to generate $5 billion of annual revenue by 2025 and do it with a 45% adjusted margin. That would be about 2.5 times their revenue today from that segment with higher margins. There you go. You can see on the bottom, $2.25 billion in adjusted net income. Their market cap today is about $14 billion. So, if they're right, the stock would be a steal today. Do you think that's achievable?

Jason Hall: Yes, I do. I think partly, Matt, remember we go back a few months ago. I guess it's almost four or five months ago at this point when we first started talking about it. For three months now, when the announcement was made, they were going to wind down their iBuying business. If these guys can really focus on being an aggregator then I like the business as an asset-light business model. This doesn't even fully talk about all of the ways they can be an aggregator. This is really just the things that they are already doing and not even talking about being an aggregator for the iBuying companies that are still out there, which I still think is just a big opportunity. But, you look at some of the metrics that they have like one out of every four people that bought a home last year were on Zillow's website. Over 60% of the share of traffic for real estate goes to their site. The second largest is Realtor.com at like 20% and Redfin (RDFN -3.75%) is less than 20%. It is a dominant platform. It's the business, I think, that can generate tremendous cash flows and margins. I think really, at the end of the day, I'm beginning to wonder more and more, Matt. I think it was more about just all of the additional risks and leverage that comes along with trying to be in the business of essentially flipping houses and all of the additional operating expense that comes along with it would potentially weaken all of the other moats that it has for all of the other things that it does for people that come to it that aren't necessarily looking for it to be the partner in buying and selling houses. It was a better, cleaner business just to focus on that asset-light model. I think it's a huge goal because it's three years from now to get to those levels. We'll see. What do you think?

Frankel: It sounds like when they got out of the iBuying business, the primary reason for exiting was not because they didn't think the business had potential. It's because Rich Barton has no interest in a revenue stream that goes like this. It's up and down and up and down. They want consistency. To me, it sounds like they're leaving the door open to partner with iBuyers. They're not saying the business is bad. I think they're going to end up partnering with Opendoor (OPEN -2.32%) and Offerpad (OPAD -2.06%) and Redfin maybe to send them leads because, like you mentioned, I think it's a 63% market share actually. Redfin and Realtor.com are the risks. There's a little sliver.

Hall: Like 95%. They're an enormous amount those three.

Frankel: I could see them partnering with iBuyers, which can be a great source of high-margin revenue. I'd like them to step on the gas and do that. I think it's an ambitious goal. I think they can get there though. If they do, this stock could retest the highs by that time?

Hall: I was going to say and, it's only a few months, so I realize that I am crowing way too early here. But, I remember you were very seriously considering selling and moving on from Zillow because a lot of your thesis was wrapped around iBuying. You still are a big believer in iBuying. I think that there is going to be some pure-play iBuyers that are going to do well. I don't think it's going to be a panacea for the entire industry. But, I bought. I decided to take a calculated risk and trust management. And they're changing the strategy for Zillow, and where they think that Zillow can succeed and it's working so far. Here's the thing. The stock's still down well over 70%. As much as it's bounced back, it's still way down. Like you said, if they hit this goal, it's going to look dirt cheap in a few years.