(This is an edited and highly-abbreviated quick pitch pulled from the SumZero community)
Analyst: Rohit Dewan
Firm: Olm Capital Management
Industry: Hedge Fund
Location: New York, NY
Recent Price: $29.23
Target Price: $40.00
Zillow (NYSE: Z) belongs in a highly diverse category of high-growth internet and media companies. Many of these companies have business models based on either subscriptions or advertising or a combination of the two. While the business models are similar, the target markets are in most cases very different.
LinkedIn primarily targets recruiting and career-related marketing, Ancestry.com targets the genealogy market, WebMD (Nasdaq: WBMD) the medical market, and Netflix (Nasdaq: NFLX) and Sirius (Nasdaq: SIRI) target general entertainment. In terms of growth rates and general financial model, Zillow is most similar to LinkedIn (Nasdaq: LNKD), but is much smaller. The embedded network effect of LinkedIn’s social network almost certainly is the source of a greater sustainable competitive advantage than Zillow’s position in the real estate valuation area, and likely justifies a higher overall valuation for the firm.
On the other side of the spectrum, Ancestry.com (Nasdaq: ACOM) has executed against its business plan but faces a great deal of uncertainty about the ultimate size, sustainability, and growth of its target genealogy market. In contrast to Ancestry, Zillow’s market of online real estate advertising is growing in light of a general shift toward online advertising and Zillow’s own efforts to include off-MLS listings and bring in home-building companies and master planned communities.
The key factors to consider when valuing Zillow are:
1. A substantially higher growth rate than its peers (ex-LinkedIn);
2. Advantageous competitive positioning and;
3. A large growth runway.
The company’s own “target model” appears inadequate as a starting point for valuation as it seems likely that the current high level of revenue growth will continue well past the target model--even more so if housing market cyclicality and Zillow’s secular growth trend eventually coincide.
Zillow’s market opportunity, pricing power, dominant brand, recurring revenue, and favorable competitive dynamics all warrant a premium valuation. The key risks to consider are the sustainability of current growth rates, the “one-trick” nature of the company with regard to Zestimates, and the broader risk associated with a prolonged housing downturn.
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