I've owned Zillow (Z) for about the last six months, and I've been putting up with multi-standard-deviation moves even as the price ultimately came out basically unchanged over that period -- until the last two trading days. The stock has now decisively broken out from a very long consolidation, and everyone is following it higher. What is the story?
Well, the big-picture story is that Zillow has microscopic market capitalization of $3 billion, which is incredible when you consider that it is the biggest, most popular and soon-to-be profitable real estate portal. Compare that with King.com, which set the valuation of its upcoming initial public offering as high as some $7 billion -- or WhatsApp, which Facebook (FB) agreed to buy for $19 billion -- and you get an idea of just how valuable an Internet property like Zillow could be.
I don't have to spend a lot of time going over what Zillow does, because everyone loves window-shopping for houses, and Zillow is the best place to do it. You can read up on the background on the Zestimate, Zillow's pricing algorithm for houses, and on its relationship with the real estate industry, which is very testy indeed. On Monday, Zillow was sued by Move (MOVE)-owned Realtor.com and the National Association of Realtors for poaching two of their top employees. But that's all out there on the Internet if you want to find out more.
Zillow is a disruptive force in real estate and, as illustrated by the lawsuit, the real estate industry isn't happy about this. Consider this: As you travel across the globe, you'll see that American real estate agents are the most highly compensated in the world -- by a lot. Lots of smart people thought that commissions would come down in the last cycle, but they didn't. If you want to buy a house, it's still 6%, and these guys don't usually budge.
The real estate agent is the classic example of an occupation that needs to be rendered obsolete by technology. Sure, you will need someone on the ground to let you in the house so you can check it out, but is that person worth 6%? In most countries, they're worth only 2% or 3%. The NAR is a powerful interest group, and it has successfully protected the economic rents of its members. It used to be that the real estate agent had another function -- providing information -- but now the Internet does that. So I ask again: Why are we paying this person 6%?
I don't know what Zillow has up its sleeve, but if you use your imagination, there are a whole bunch of ways they could cut realtors out of the transaction. The realtors will be as happy about that as cab drivers are about Uber, and there will be a lot of pain. But without pain, there is no growth.
Zillow used to be my tiniest position until I fortuitously doubled it last week -- and I may add to it some more. I try to keep my expectations in check, but this is shaping up to be a fundamental and technical home run. Right now I have dollar signs in my eyes, so this is the point of the article where I should sober up and sign off and get back to managing the risk.