The Biggest Risk Zillow Faces Isn’t What You Think It Is…
If there is one name this year that has confounded the shorts (aside from Telsa Motors (Nasdaq: TSLA) it has to be Zillow (NYSE: Z). Late last year this stock was in the $20s after posting quarterly earnings that failed to impress. Today it’s burning through the $90s, and that’s after absorbing a large secondary at $82.
Bulls believe Zillow CEO Spencer Raskoff is to the online real-estate market what Elon Musk is to cars : A larger-than-life take-no-prisoners persona that is leading a market-disrupting company and shaking up a huge, formerly hidebound, industry. Shareholders see an online listings empire that is slowly but surely muscling into taking a cut of what for most Americans will be the largest single purchase they ever make.
Bears think the valuation on a money-losing company trading in the range of 18x sales is absurd no matter what the future growth prospects hold – even James Cramer recently penned a piece pointing out that Zillow is overvalued. Shorts love to point out that for its’ flagship Zillow.com website, very few property listings are actually owned by the company. Furthermore, efforts to attract more proprietary listings from MLS listing services nationwide have run up against stiff resistance.
What I find lacking from the robust, highly-charged debate over Zillow isn’t any of these above well-worn arguments. For now at least, the marketplace has spoken : Trading in the mid-$90s, shareholders seem content to pay up for a high-growth stock, and none of the apparent holes in the Zillow business model have yet to dent the double-digit growth rate.
What I think bears & bulls should focus on instead is Yelp (Nasdaq: YELP).
That’s right, Yelp. Or, more precisely, what Yelp tells us about the future of online marketing and what that might mean for a company such as Zillow where the revenue model revolves around real estate agents paying for sales leads.
Yelp has, in the space of just a handful years, almost single-handedly cornered the worldwide market in online reviews. Scott Ryan over at Seeking Alpha wrote what I consider to be the best piece of research this summer on why Yelp is dominating its’ space, and what that means for also-rans such as Angie’s List (Nasdaq: ANGI).
His core thesis is that a large, free service like Yelp creates more and more of a value proposition to customers than a narrow, pay-wall service like Angie’s. You can further extend the argument that Yelp is more valuable as the vendor’s price tag goes up. In other words, I am more likely to be interested in what my neighbors have to say about a roofing company or a car dealership than I am, say, the nearest hardware store. As Yelp grows exponentially (the company added 3.4 million new reviews in the quarter alone, and their average monthly unique visitors grew 38% year-over-year to roughly 108 million – or more than 40 times Angie’s List! ) it will inevitably encroach large, attractive markets such as the one Zillow inhabits.
Taking Scott’s argument one step further, if the value to the consumer is more and more in online recommendations from either trusted micro-groups of friends or large crowd-sourced opinions, why would the real-estate market look any different a few years from now? If I was a newly minted real estate agent breaking into a new market, wouldn’t I be more interested in burnishing my online recommendations from people I’ve done business with than paying ever increasing ad rates to be at the top of a Zillow search page?
Now I’m not inferring that the entire ad market on Zillow.com goes away. And it’s also important to point out that Zillow has been making strides in making it easy for customers of Zillow premier agents to post reviews & recommendations.
All I’m pointing out is that in an increasingly social online experience, the value proposition of selling leads slowly gives way over time to recommendations, reviews & referrals from trusted online sources. Yelp is the leader in the that space, and at some point will need to think carefully about how to position itself in real estate. And if Yelp does make the decision to compete more forcefully, what does that do to Zillow?
Zillow’s shareholders are assuming that the marketplace of tomorrow looks a lot like that of today, with Zillow.com continuing to gain ground on its competitors while at the same time increasing geometrically the amount it can charge its’ core real estate agent-centric customer base.
But what if Yelp decides to disrupt that model? It’s not a stretch to see Yelp buying Move (Nasdaq: MOVE), which has the largest in-house proprietary database of listings in the online space. Yelp could then overlay its extremely large database of recommendations alongside all property searches. Looking up an apartment on Telegraph Hill? Yelp could provide you with the top recommended movers, painters and vermin extinguishers in the neighborhood. Wouldn’t that site be a better value proposition for the consumer long term?
Could Yelp actually Move? Its certainly not a stretch by any means as Yelp has both the market cap and access to capital to do the deal. Given where Move trades today, it would definitely be an accretive transaction. Two smart folks I know in the industry both tell me they’d be shocked if Yelp hasn’t at least considered approaching Move.
Whether or not a Yelp-Move tie-up comes to fruition, the important point here is that shareholders in Zillow are overlaying a web 2.0 vision of the future online real-estate marketplace, when instead they should be concerned about what the world looks like in an increasingly social networked environment. And from that vantage point, I think given how Zillow currently makes its’ money, shareholders have much to be worried about.
At the time of this report the author was short Zillow common stock