Let's back up a little bit before we proceed.
In case you've been living in a dumpster, Zillow announced earlier this year that they were fully transitioning their business model to Ibuying, which basically means they are now a market maker for homes in certain geographic regions.
At first blush the news of Zillow moving into a capital intensive business that translated into potentially tens of thousands of homes sitting on their balance sheet was greeted with a great deal of trepidation. Nowhere was the reluctance to participate in this "Uber of real estate" more present than long-time institutional shareholders who were happy with the capital light business of getting money from realtors for having their listings appear on Zillow's website.
Q4 earnings were announced by Zillow in February. The market initially boosted the stock up to the mid-40s range mostly on elation over stud-muffin tech entrepreneur Rich Barton coming back into the mix as CEO. In the weeks and months following their Q4 report the stock steadily sank from the mid-40s to the low-30s.
In March, Zenolytics put out a note detailing how Zillow had been one of the best performing stocks in the first half of the year for every year going back to their IPO aptly titled, "There Are Few Things As Reliable As Zillow Outperforming During The First Half of Any Year."
After releasing Q1 earnings earlier in May everything has suddenly changed. Investors are suddenly eager to participate in Zillow's growth. The losses created as a result of Zillow Homes are acceptable as long as revenues keep growing at a rapid (greater than 50% annualized) clip. Here is why this change in attitude among investors is so bullish for the stock:
- Investors have accepted the IBuying or Zillow Homes model
- Investors have accepted that the Zillow Homes model comes with sequentially increasing losses
- Zillow simply has to accelerate the pace of their home buying in order to create greater revenue growth
With respect to point #3, this isn't building a car or having the marketplace accept the newest release of your software to gain revenues. This is telling a guy in Phoenix that I'll give you $300,000 for your home in a week if you want to sell it to me. Nothing created. Very little man power. A relatively simple transaction.
And Zillow has all the credit and cash they want to effect such transactions. Never mind the fact that Zillow is the first destination (and it's not even close) for those seeking to effect a purchase or sale of a home. For that reason, they can continue an attractive level of growth in the view of the markets for the next few quarters before reaching a critical mass of homes in their inventory where investors will start getting concerned.
On May 22nd, in a follow up to our Zillow outperforming during the first half of the year article, Zenolytics recommended taking profits on Zillow. What should be noted is that if one is willing to deal with the volatility, the upside in shares of Zillow from these levels can be upwards of 100% with a great degree of certainty.
The company's completely revamped business model is now receiving endless brohugs from the market. That's a huge change in psychology towards Zillow versus at anytime in recent months. And all Zillow has to do to keep receiving brohugs is to keep making the home buying process as simple as pushing a button to sell your home.
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