Zillow (NASDAQ:ZG) is the market leader in online real estate. Since the launch of the original Zillow.com website in 2006, it has quickly become the preeminent brand name in this rapidly growing space. Like any new company, especially one with such a spectacular growth runway ahead of it, there are going to be some major bumps in the road. In July 2014, the stock hit a peak of $160 per share. In the ensuing year, it has shed about half of its market cap.
The stock still trades for more than double the price it closed at on its IPO day in 2011. Even with bumps and bruises along the way, the stock has performed admirably.
Trulia is being incorporated effectively
Zillow officially became Zillow Group after the February 2015 acquisition of Trulia, which was then the second-largest player in the space. The deal was announced on July 28, 2014, which was the day Zillow closed at its $160 high. The stock's moves since that day show the difference between the (sometimes) short-term exuberance of the market and the real heavy lifting required to build a great company for the long haul.
While Zillow stock may have weakened in short term since the Trulia deal was announced, I think the deal adds transformational future value to the company. Over $13 billion a year is spent on real estate advertising in the U.S. annually. This is moving from highly fragmented local papers and commercials to large online sites like Zillow. This transformation is not going to happen overnight, but I feel very confident in its near inevitability.
When this happens, the players with the largest audience and the best mobile experience will draw the bulk of these dollars. Trulia, as Zillow's main online competition, was the only company really poised to challenge it. As a combined entity, Zillow Group generated over 59 million monthly visits in June 2015. The next most popular site had only 20 million.
Furthermore, mobile is becoming the name of the game in real estate. Being able to search for homes and rentals on one's smartphone, while riding in a car or walking around a particular neighborhood, peels back the veneer that used to empower real estate agents and leave consumers in the dark. Trulia was particularly strong with mobile, which accounted for a majority of consumer usage on the platform, and will prove to be a valuable asset for Zillow Group.
More smart acquisitions ahead
Zillow recently acquired a company called DotLoop. From the press release, the company is described as one that "simplifies real estate transactions by enabling brokerages, real estate agents, and their clients to share, edit, sign and store documents digitally."
I find it's most helpful when looking at an investment to see if you can boil down the company to a single sentence or two. You can then look at all of a company's decisions though that particular lens and see if they make sense. For Zillow, the goal in my mind is "simplifying and adding transparency to real estate transactions through the use of mobile technology and the web."
When viewed through this lens, I think the DotLoop acquisition is a slam dunk and will bear plenty of fruit for patient investors in the future. Removing the friction of the physical signing and editing of papers makes it easier for consumers to buy and sell real estate through online channels like Zillow.
New focus on advertising
The company has launched what it calls an "award-winning 'Find Your Way Home' national advertising campaign." The series, which currently includes six spots, focuses on showing how "Zillow's multi-platform technology propels each stage of the characters' home search, particularly through mobile devices."
Zillow is meeting customers on their mobile devices. Focusing on ease of use, providing real-time price estimates for homes and rentals, and reaching more consumers through traditional advertising methods will allow Zillow to continue to grow its already staggering mobile presence. "In April alone, more than 600 million homes were viewed on Zillow Mobile -- that's 232 homes per second," according to the company.
Zillow could still go down more... and that's OK
Zillow is executing well on the business front. It's pushing itself into the relatively nascent but potentially huge online real estate market. The greatest rule-breaking companies will usually experience a number of times throughout their public lives when their stock price is cut in half or more.
As investors, we must focus on the business and use fluctuations in stock price to buy pieces of wonderful companies that we plan on holding for the long haul.
At current prices, Zillow is near the very top of my watchlist. For investors who are looking for potentially explosive long-term growth and don't mind a little near-term volatility, I would recommend taking a deeper look at this company.