1 High-Growth PropTech Stock to Buy Now

October 19, 2021

Zillow stock buy

In stock markets, long-term investors will occasionally find buying opportunities present themselves for certain stocks that have been sold off.

That’s because the “noise” created by a company announcement may cause an overreaction/panic from investors who may have committed a very common mistake; “sell now, ask questions later”.

Coincidentally, that’s what happened on Monday to Zillow Group Inc (NASDAQ: ZG), an online real estate marketplace company that helps match sellers and buyers.

Operating in the crossover niche between property and technology, in what’s also known as “PropTech”, Zillow has brought the digital transformation trend to the real estate market in the US.

So, here’s why the recent share price correction is overdone and why investors can consider buying and holding this high-growth stock for the long term.

Suspending US home buying

The key reason for the fall in Zillow’s share price was an announcement that the company is suspending the buying of US homes.

One of Zillow’s business units is called “Zillow Offers”. Effectively, Zillow uses algorithms to generate a price for home sellers and, if accepted, then does some light renovations before flipping the property in the market for a profit.

While these so-called “Zestimates” on individuals’ home prices have become very popular, Zillow has a backlog of homes to sell given it acquired a record 3,805 homes in just the second quarter alone (see below).

Zillow Offers homes Q2 2021

Source: Zillow Q2 2021 shareholder newsletter

As a result, its share price cratered and it finished the day down 9.4%. While Zillow had an extraordinary 2020, gaining over 200%, its shares are currently down around 37% so far in 2021.

Core business remains strong

However, long-term investors should be aware that Zillow actually makes most of its profits via its Internet, Media & Technology (IMT) segment.

For Zillow’s IMT segment, there are two ways of making money. First, sales are generated mainly by charging property companies to advertise listings on the Zillow Rental Network.

Zillow then provides prospective renters to these advertisers. It has been a huge market opportunity for the company given there are over 43 million homes occupied by renters in the US.

Meanwhile, the second way IMT makes money is through Zillow Premier Agent. This service provides real estate agents with the online tools, including data-driven insights, to generate increased leads and close deals more effectively.

In its latest second-quarter earnings, IMT only made up around 37% of Zillow’s total revenue of US$1.3 billion but had an adjusted EBITDA of US$218 million – its only profitable segment among its three main divisions (the other two being Zillow Offers and Zillow Home Loans).

As a result, it’s not a surprise to see the IMT segment post both solid revenue growth and margin expansion in its latest quarter (see below).

Zillow IMT segment profit margins

Source: Zillow Q2 2021 shareholder newsletter

Look at the growth runway

So, Zillow shares have been punished but it seems to be an initial overreaction given Zillow Offers contributed less than 15% of Zillow’s overall US$538 million in gross profit in its latest quarter.

Rather, Zillow is looking to build a real estate ecosystem that see agents, buyers and sellers spend increasingly more time on its platform.

For long-term investors that believe real estate is ripe for even more technological disruption over the next decade or two, then Zillow is a leader in the space.

Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.

Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.

He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.

In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.

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