THREAD: My current best PA idea with 8-10+ year horizon is Zillow Group $Z / $ZG in the $55 context
You own two value streams:
1) Core online marketplace - $30/share
2) $Z eating the RE transaction pie over time - $30/share from Homes + free option on other services
(1/x)
You own two value streams:
1) Core online marketplace - $30/share
2) $Z eating the RE transaction pie over time - $30/share from Homes + free option on other services
(1/x)
Online Marketplace:
This is a 2-sided network at scale that is near-impossible to duplicate once established. Buyers and sellers are extremely fragmented and the existence of Zillow has meaningfully improved consumer lives.
Earn revenue from providing leads to RE agents. (2/x)
This is a 2-sided network at scale that is near-impossible to duplicate once established. Buyers and sellers are extremely fragmented and the existence of Zillow has meaningfully improved consumer lives.
Earn revenue from providing leads to RE agents. (2/x)
Option on the RE txn pie:
Buying a home has massive transaction costs, namely 1) RE agent commissions, 2) mortgage origination costs, 3) title & escrow services, and 4) physically moving stuff.
$Z is going to eat more of this pie while making it smaller. (3/x)
Buying a home has massive transaction costs, namely 1) RE agent commissions, 2) mortgage origination costs, 3) title & escrow services, and 4) physically moving stuff.
$Z is going to eat more of this pie while making it smaller. (3/x)
They are starting by flipping homes. This is just to insert themselves into the hear of the transaction. They can eventually generate a couple hundred bps of margin by driving down selling costs, but this will never be a great margin biz given how well-priced the market is. (4/x)
However, it does two very important things:
1) Commoditizes RE agents over time
2) Gives $Z a right to win all adjacent transaction services
1) RE agents are in the business of aggregating buyers for a seller, or vice versa. $Z does this better. (5/x)
1) Commoditizes RE agents over time
2) Gives $Z a right to win all adjacent transaction services
1) RE agents are in the business of aggregating buyers for a seller, or vice versa. $Z does this better. (5/x)
Over time, the RE agent becomes an open-house operator and logistics manager. Wouldn't be surprised to see $Z employ their own RE agents in their core markets.
RE agents today suck out 4-6% of every transaction in fees. $Z can drive this down to 2% and take the delta. (6/x)
RE agents today suck out 4-6% of every transaction in fees. $Z can drive this down to 2% and take the delta. (6/x)
RE agents can still make the same personal P&L because $Z will be pushing them way more volume.
Virtuous cycle - if an RE agent can make more or similar money as $Z agent with less work, more will move to $Z, further driving down cost. (7/x)
Virtuous cycle - if an RE agent can make more or similar money as $Z agent with less work, more will move to $Z, further driving down cost. (7/x)
2) Right to win other services.
Suddenly, all these buyers and sellers are using $Z more actively given $Z is a part of the transaction. Today, RE agents drive the title insurance purchase decision. Tomorrow, $Z drives it, and it drives that purchase to itself. (8/x)
Suddenly, all these buyers and sellers are using $Z more actively given $Z is a part of the transaction. Today, RE agents drive the title insurance purchase decision. Tomorrow, $Z drives it, and it drives that purchase to itself. (8/x)
Here's how I valued the existing businesses:
Marketplace -- $30 per share intrinsic value throwing off ~4-5% FCF yield over 8-10 years
Homes -- also $30 per share intrinsic value throwing off 3-4% FCF yield over 8-10 years (more back-dated FCF)
(9/x)
Marketplace -- $30 per share intrinsic value throwing off ~4-5% FCF yield over 8-10 years
Homes -- also $30 per share intrinsic value throwing off 3-4% FCF yield over 8-10 years (more back-dated FCF)
(9/x)
Translates to $60-$65 of intrinsic value. I like the stock at $55, which provides 10 year FCF yield expectation of 7-8% for a business with ongoing growth (from HPI and internal). So if 5% yield is fair in 8-10 years, the stock will be worth ~$85, driving 5% IRR from $55.
(10/x)
(10/x)
I get it, not terribly exciting, but remember this is 5% IRR driven by real FCF growth in existing businesses and buying at ~10% discount to intrinsic.
Meanwhile, I haven't modeled any value from the significant growth potential of mortgage origination or title & escrow. (11/x)
Meanwhile, I haven't modeled any value from the significant growth potential of mortgage origination or title & escrow. (11/x)
Long story short, I think you're buying in at a 10% discount to intrinsic, earning 5% IRR from the existing business over 8-10 years, and getting a free option on $Z taking over adjacent services. This feel defensive given how strong the moat is for the core business. (12/x)
Lastly, the business replaced its CEO in early 2019 with the original CEO/founder, Rich Barton. He controls the biz (dual-class voting) and owns $685mm worth of stock. He previously co-founded Expedia as well. I like the biz being back in an owner-operator's hands. (13/13).
