“This hunger for freedom and an innate drive to empower consumers is also the spark of the ideas behind my philosophy of company creation and investment—what I call “power to the people.” Revolutionary companies give power to the people, which they use to disrupt entrenched incumbents and usher in a new order.”Rich Barton
A Beautiful Business
Zillow stock is too cheap. Their IMT business is simply wonderful. Primarily made up of their Premier Agent segment (primarily leads for real estate agents), IMT has trailing 12-month sales of $1.8B and adjusted EBITDA of $0.8M. Revenue growth is strong at 47% growth since June 2019 (2 year period because COVID). All of this is ignoring everything else Zillow does. Why is a growing business, with beautiful margins only trading at a market cap of $22B, (~30x adjusted EBITDA*)? My theory is the market doesn’t trust this business will be here in the future. Why would the market think that? Because Zillow is actively trying to move away from this business.
From Beautiful to Ugly
Rich Barton wants to disrupt real estate. He’s been trying to since Zillow became a company. Initially, Zillow wanted to be a real estate marketplace, but that failed. Eventually, Zillow took off when the Zestimate became the new hottest thing. Flush with traffic but unable to disrupt the real estate market, they monetized their traffic by working with the current model.
Having a beautiful business that makes a ton of money isn’t enough for Zillow. Their leadership thinks someone is going to disrupt real estate, why not them? Whether it be iBuying or the elusive real estate marketplace, Zillow wants to be the player, even if it costs them a beautiful business. I love businesses that are ready to disrupt themselves.
I’m not saying Zillow is ignoring their IMT segment. They are still actively building and growing that segment. Zillow’s goal is to make that segment irrelevant. Real estate transactions are painful, Zillow wants to make them less painful. They can achieve this by lowering costs, by better sharing information, through technological innovation and through financial innovation. You either disrupt yourself or get disrupted by someone else. Zillow is choosing the short-term expensive, long-term profitable path.
It may sound like a simple decision to focus on the long term, but I promise you it isn’t. Many great companies became no longer great by focusing too much on the short term. Zillow isn’t that kind of company. Zillow is experimenting. It may be an expensive experiment, but it is worthwhile.
I don’t know quite what the next chapter for Zillow will be, but following their north star of giving power to the people is a path I trust. The market hates unknowns. Zillow’s future is a massive unknown. I’ll embrace the uncertainty and trust management’s impressive track record. The market might be scared, but I’m not. Long Zillow.
*Another quick rant - even though I used adjusted EBITDA - it is a dumb metric. Stock based compensation is a huge expense and should be recognized. Yet, even factoring that in, I still think Zillow looks too cheap.
P.S - as part of my research, I put together THIS spreadsheet with some Zillow information. Enjoy!