Stock Pick – Zillow

I made my first stock purchase in awhile, Zillow. All my other recent investments were PM ETFs, SLV and PHYS. I figured I should make a non-PM buy. I bought 100 shares on Monday at $56.15/share. (I know. I’m already behind. Don’t judge an investment based on the performance over a few days. I may average down if it drops more.)

Zillow has a chance to outperform gold and silver over the next 5-10 years.

There are many risks in any stock market investment. There’s the Principal-Agent Problem, where the CEO and executives are tempted to line their pockets at the expense of shareholders. The CEO can waste shareholder money hiring his friends at overpriced consulting contracts. There’s all the waste and inefficiency of a large corporate bureaucracy. There’s dilution of your ownership as the CEO and executives grant themselves shares and options. Zillow might provide returns good enough to overcome this drag.

Due to the Ponzi nature of the stock market, the more people I can convince to copy my investment, the better my returns will be! I will explain my analysis, because it’s interesting.

Anyone who works in the real estate industry and has computer literacy knows that it’s a market ripe for disruption. A lot of fruitcakes have approached me with their multi-billion idea for a real estate listing website. I’ve developed a good idea for how I would build a real estate listing website. Zillow matches my “ideal” real estate website pretty closely. I looked at Zillow’s closest competitors, and their websites are junk by comparison. Now, when a fruitcake approaches me with his stupid real estate website idea, I’ll respond “Forget it! Zillow is better than your website ever will be.”

Here is one example. When you search rentals, Zillow has an option for an in-unit washer/dryer. Zillow’s closest competitors don’t offer that feature conveniently. That’s just one example. There are many little things that make Zillow’s website much better than its competitors.

That is my #1 reason for investing in Zillow. As a software professional, I analyzed their website, and concluded that their programmers are much better than their competitors. However, there is no guarantee that will continue in the future. There can be a management change and all the competent people quit or get fired. Some fool may have a brilliant idea of rewriting their website in the latest trendy language, and then it would suck. (I tried to find out what technology Zillow is currently using, but couldn’t. They mention WordPress, which is a sign of competence.) Even with that risk and all the usual risks of stocks, I’ll invest a little in Zillow.

When I told my some people that I was considering investing in Zillow, they said it was a stupid idea. That’s how I know it’s a good investment. One person said “The real estate market is crashed and dead. Forget it.” People are still going to buy and sell homes. It may still be slow, but it’s guaranteed to recover eventually.

One person said “$50/share! That’s too expensive.” That’s a classic fallacy. When buying a stock, you only care about percentage gain or loss. The price per share is irrelevant. It’s the same to buy 100 shares at $50/share or 500 shares at $10/share. The true price of a stock is the market capitalization. At $2B, Zillow is cheap, especially compared to $18B for LinkedIn and $55B for FaceBook.

My “evaluate website” technique is pretty simple. I type my zipcode into the search bar, and look at the results. I look around a little, and check out the ease of navigation.

Here is a list of the top real estate listing websites. Notice that Zillow is #1. Zillow has the most listings and the best Alexa rank. (There are problems with Alexa rank, but it’s hard to fake a high rank.) If you search for “Real Estate Website”, Zillow is the #1 Google search result.

#2 is Yahoo Real Estate. Yahoo is a corporation run by twits, so I can immediately dismiss them. Zillow and Yahoo have an agreement to share listings, which seems weird.

#3 is Trulia. Their website is clearly inferior to Zillow. On my slow DSL, it’s laggy when it loads. Trulia just made a $355M acquisition of MarketLeader, which is cause for a concern when someone is trying to grow via mergers rather than building a better business. (Zillow made some acquisitions, but smaller ones.) Trulia has a decent amount of listings, but a lot less than Zillow.

#4, #5, and #6 are realtor.com, homes.com, and rent.com. The domain name is a tipoff that those websites are run by clueless people. Their founders/CEO probably are fools that think they’re going to succeed just because of the domain name. Their websites aren’t as nice as Zillow, and they have too few listings to be interesting.

#7 is RedFin, which has a stupid business model. They’re hiring agents and paying them a salary instead of commissions. They only offer service in areas where they have agents. Why is that stupid? That isn’t a proper Internet business. If they have to hire agents in every city where they list homes, they are never going to get the scale benefits of an Internet-based business.

The other websites have too few listings for me to waste time analyzing them.

Summarizing, based on quality of website, # of listings, and Alexa rank, Zillow is the clear market leader. Internet real estate listings is likely to be a winner-take-all market, like eBay. People will go to the site with the most listings, both to list their own home and to search for a home.

I was surprised that craigslist didn’t make the list. However, craigslist’s text-based UI is not optimized for real estate. Craigslist uses the same text-based UI whether you’re renting an apartment, looking for a job, or hiring a prostitute.

It is hard for the Internet to replace real estate brokers, due to the “double disintermediation problem”. For a typical real estate transaction, BOTH parties usually use a broker. This makes it easier for brokers to enforce their cartel, because most brokers will refuse to deal with discount brokers or someone who has no broker. In order to do a cartel-free transaction, both parties need to be acting independently, which is rare when the cartel controls almost the whole market.

Real estate is a big financial transaction, so most people feel the need to have a broker helping them. I’m an adult and can negotiate for myself, but I understand that most sheeple don’t think that way. When you realize that a 5% commission on a $500k home is $25k, that’s a BIG price to pay for having someone help you. Also, the broker suffers from the Principal-Agent problem; his interests are not perfectly aligned with his client. When selling, the broker may try to bully you into lowering the asking price so he can score his commission. A broker is willing to risk $1k-$2k off his commission to seal the deal for a $24k commission, but the home seller is losing $25k-$50k in asking price. A broker might try to convince you to buy a home you might not have otherwise.

Real estate brokers control the “national listing service”, a database of all homes available for sale. There is no Internet-equivalent. The national listing service charges huge fees for access, so they aren’t going to put their database on the Internet for everyone to see. The “national listing service” is the main thing that gives real estate brokers their market power and cartel. The Internet has the potential to eliminate that. It hasn’t happened yet, but it’s almost guaranteed to happen eventually.

Currently, Zillow does not directly compete with brokers. If they did, brokers would not list their units on Zillow. Instead, Zillow makes money from advertisements. However, if Zillow convinces enough individuals to list directly, then Zillow could start challenging brokers. Zillow is currently the market leader, giving them an advantage for when the Internet replaces the real estate broker cartel.

My #1 reason for investing in Zillow is that their website is way better than their competitors. As a skilled software engineer, I can make that analysis better than most people. However, there are many risks with any stock, including the risk that Zillow will fire all their competent employees and ruin their website. Even adjusting for these risks, Zillow may outperform gold over the next 5-10 years. Zillow is the current market leader in a potential multi-billion dollar a year industry. With a market capitalization of only $2B, it’s a good risk.

7 Responses to Stock Pick – Zillow

  1. Zillow does have a nice website. Not sure about their financials yet. Their revenue is quite low for a $2B company. They could however take off…

    I’m personally more of a trader, mostly on Asian and European markets. My approach has been to time and trade already established companies, rather than gamble on startups. But that’s just my comfort level.

    Good luck with Z, your analysis does seem pretty decent – they could double up or better in the next few years, assuming they find a better way of monetizing their site.

  2. Anonymous Coward June 9, 2013 at 8:08 am

    Google as thick as pig-shit:
    ============================

    In past posts, FSK has commented that he has visited ClownLand, sorry Google, for job interviews.

    Well, FSK did these clowns ask you about concurrency, locking or threads?

    Could these fools even pass an undergraduate computer science degree course?

    It seems as early as 2005, advertisers can set a maximum daily budget. But the Google clown code is buggy and regularly goes over this.

    If you do an Internet search for things like
    google adwords budget sue

    you will see many articles about people suing Google for over-billing them. Here is one of them.

    http://www.searchenginejournal.com/howard-stern-suing-google-adwords/2010/

    If Google employs the best computer scientists in the world, why can’t they properly synchronize the current daily spend across their servers?

    Given the huge cost of clicking on adverts now, at times I only get a handful of clicks a day from my daily budget spread across a whole day. So these idiots have hours potentially to synchronise data. But these fools can’t do it and get it right.

    The daily advertising budget bug existed since 2005 and even suing Google, can’t make their best and brightest computer scientists fix this bug.

    What a joke?

    FSK said he thought the standards were going down as his second lot of interviewers seemed more daft than the first lot.

    Did these clowns ask FSK about concurrency? That would be a laugh. These idiots can’t even get their own code to work and being sued multiple times isn’t enough incentive for them.

    • There’s be one simple and obvious fix. If Google accidentally goes over the maximum budget an advertiser sets, then only charge them the maximum. Alternatively, start showing ads less frequently when an advertiser gets close to the limit.

      • Anonymous Coward June 9, 2013 at 5:48 pm

        You are brilliant.

        The Google clowns should have hired you.

        Still up to a week ago, Google were regularly going over my budget.

        In my humble opinion you are smarter than all the Google clowns.

        The trouble is these clowns spend all their time saying how smart they are instead of cleaning up the nasties in adwords screwing over advertisers.

        • I don’t understand why you’re upset about Google cheating advertisers. If it sucks so much, stop using it. (However, Google does have a near-monopoly position in search advertising.)

          • Anonymous Coward June 10, 2013 at 5:45 am

            I actually have very recently stopped and moved over to advertising on bing.com, microsoft and yahoo properties. The cost per click is typically 5 to 7 cents as opposed to 80 cents and well above on google.

            Traffic to my website has almost tripled and decent money flowing in.

            Google has taken money from me in obvious click fraud and despite being a long-standing customer of theirs who has put a lot of money their way, they refused to give the specified money back.

            I merely wish to comment in my opinion they are either dumb or purposely dumb, because it suits what they want.

          • Anonymous Coward June 10, 2013 at 7:00 am

            I could likewise say, why are you so upset about nice Uncle Ben printing lots of money and giving it away to his friends? He has a nice beard. You should use BitCoin, gold or silver if you don’t like the US Dollar!

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