The last time I wrote about Zillow Group (NASDAQ:, NASDAQ:ZG) was in December 2018. At the time, Z stock had over three months, prompting me to suggest investors buy on the dip.
Up 57% in the 14 months since, I see the companyÃ¢ÂÂs latest initiatives as the first of many moves to get its share price back above $100, possibly as high as $150 where it traded in July 2014.
However, with it has its work cut out for it.
Zillow Offers More for Home Buyers
My primary motivation for picking Zillow as a stock to buy on its double-digit dip was Zillow Offers. At the time, it was less than eight months into launching in Las Vegas and Phoenix, a new business for the company that would see it buy and sell homes.
Investors did not like the idea of the company wandering into other areas of the real estate market, but Zillow doubled down on its move into the buying and selling of homes by in November 2018. By purchasing a mortgage lender, it was helping streamline the home-buying process.
Fast forward to 2020.
Zillow announced in late January that it was partnering with 10 regional homebuilders in Georgia, North Carolina, Texas, Florida and California. The homebuilders will provide customers and Zillow will buy their old homes with closings as long as eight months, making the process of purchasing a newly constructed home as easy as possible.
Motley FoolÃ¢ÂÂs Steve Symington called the partnership Ã¢ÂÂa win-win-winÃ¢ÂÂ for everyone involved, pointing out that are canceled because homebuyers are unable to sell their homes in time to close the purchase.
I know from my brotherÃ¢ÂÂs experience that it can be a nightmare trying to time real estate closings while chasing down additional financing.
The addition of these 10 regional homebuilders with the homebuilders it already announced in gives Zillow Offers serious coverage across the country.
Zillow management believes that within the next 3-5 years, it could be buying as many as 60,000 homes annually through Zillow Offers, generating as much as $20 billion in yearly revenue.
Shorts Fail To See The Big Picture
ItÃ¢ÂÂs easy to see why 27% of its stock is short. In the first nine months of 2019, the companyÃ¢ÂÂs homes segment had revenue of
ThatÃ¢ÂÂs the good part. However, on the bottom line, it lost $158.8 million in adjusted EBITDA.
But remove the Homes segment from ZillowÃ¢ÂÂs business Ã¢ÂÂ that includes excluding the Mortgages segment because it doesnÃ¢ÂÂt need mortgage origination without the buying and selling of homes Ã¢ÂÂ and you get a company that had an adjusted EBITDA margin of 22.6%. ThatÃ¢ÂÂs a heck of a lot more attractive.
What investors betting against Z stock fail to see is the bigger picture.
Like Amazon (NASDAQ:), Zillow is looking to control an important part of the home-ownership experience. Given AmazonÃ¢ÂÂs desire to sell consumers everything they need in their homes and lives, I could see Amazon buying Zillow in the future.
My advice to Jeff Bezos: Make an offer sooner rather than later. It will be better for all shareholders, including yourself.
How Does Zillow Offers Get Z Stock to $150?
The simple answer is, it doesnÃ¢ÂÂt. It gets Z stock out of the rut thatÃ¢ÂÂs had it trading in a range between $25 and $50 since August 2015.
To get to $150, itÃ¢ÂÂs got to have all three segments generating positive adjusted EBITDA margins. Currently, while the Internet, Media, and Technology (IMT) segment has an adjusted EBITDA margin 23%, the Homes and Mortgages segments have margins of -21% and -19%, respectively, for an overall 2% margin.
LetÃ¢ÂÂs assume that these margins flip from negative to positive. ZillowÃ¢ÂÂs adjusted EBITDA would change from $42.1 million to $403.2 million and an overall margin of 22.4%.
Zillow currently trades at Assuming it has a 10-fold increase in adjusted EBITDA and an increase in the price-to-sales ratio to 20, ZillowÃ¢ÂÂs market cap would grow to $43.2 billion.
Based on 58.5 million shares outstanding, thatÃ¢ÂÂs a stock price of $738.46. Naturally, I donÃ¢ÂÂt think thatÃ¢ÂÂs going to happen anytime soon. However, in 2-3 years, itÃ¢ÂÂs not unrealistic to see Z stock hit $150.
If I had a gun to my head and had to choose between shorting its stock and going long, IÃ¢ÂÂd go long every day of the week and twice on Sundays.
Despite being 76 cents from a 52-week high, I still think ZillowÃ¢ÂÂs a screaming buy.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.