Zillow is undervalued at 13x forward earnings due to high growth in rental and mortgage segments and a defensible data position against AI threats.

Okay, let's move to a slightly different market , a company that's not quite that big, but perhaps in a larger market, and that's Zillow. Zillow 's market capitalization is only about $7 billion.

Do you know what Zillow's growth rate has been over the last 12 months? That surprised me, guys. I mean, you're asking me . I'll just say I thought it would probably be in the single digits.

It's not in the single digits . It's 18% over the last 12 months.

But, you have to break this business down into its three main segments, and I think that's the part that gets really interesting for investors. The residential business is kind of sluggish .

Residential sales are low. That means agents are making less money, and ultimately, agents are footing the bill for Zillow. But, Zillow's big-growth segment is rentals, and that's what It makes it more like a "platform business."

If you go into Zillow—and I think it's a purely US company , so maybe that's a product I'm a little more familiar with —but if you go into Zillow not just to look for a house to buy, but also a place to rent, then, by the way, mortgages are a growing business for them.

So, these two segments, rentals, since the March 2024 quarter, have had a compound annual growth rate of 34 % in the rental business. And the mortgage segment has grown by 52%.

Now , the residential business, which is still their largest business during that period, has grown by only 8.1% . So, that's the bottleneck that's impacting the business. But if at some point the housing market gets back to where it was five or six years ago, we're talking about a business that's going to get a big boost in all three of those segments .

They now have positive free cash flow. And they've started buying back shares. I think the valuation is very attractive after the big pullback the stocks have had . The forward price- to-earnings ratio is only 13.

So, you have a company growing at 18% in It's a tough time for the market, yet it's still trading at 13 times earnings. If any positive news emerges in the future, this is the kind of company I think will deliver what we've been talking about.

Revenue growth, margin expansion , and multiple growth are all factors that could provide a positive boost.

I was quite surprised when you mentioned how much the company has grown over the past twelve months ; I was only expecting single-digit growth given the environment we're currently in and likely to continue in for the foreseeable future.

Now, if they're able to achieve this growth despite some challenges, you're right, and perhaps if those challenges turn into positives, we could see Zillow's business accelerate.

It's really interesting. Maybe I should look into Zillow's situation. I haven't followed Zillow since 2021 or so, when growth was probably...yes. Yes, it was more focused on direct buying.

Another thing to consider, and it falls into the same category as Zillow as these AI tools improve, is companies that have a kind of data and user interface that won't disappear and won't simply be replaced by Cloud or ChatGPT.

I think that's where they're in an interesting position because they have all that information, all the photos, all the space data, and it all ends up on Zillow, not just for houses but for rentals too. So they can use their AI tools to help agents.

So , if you've ever dealt with an agent on Zillow, you'll find that there are automated responses they can send you. I actually caught one when we were looking at a house, and he had an automated response ready the next day, I think.

Hey, I was just checking in and thought to myself, "Oh, I see you're using Zillow, " because I could tell from the way you wrote the content, but it was actually quite good, and it makes their work more efficient using Zillow data .

So, it's a kind of connection with them, and I think that's a very good position if you're looking for companies that might be undervalued , with a more stable business than the market realizes, and potentially with AI as a driving force rather than a disruptive threat.

and thought to myself, "Oh, I see you're using Zillow," because I could tell from the way you wrote the content, but it was actually quite good, and it makes their work more efficient using Zillow data .

So, it's a kind of connection with them, and I think that's a very good position if you're looking for companies that might be undervalued , with a more stable business than the market realizes, and potentially with AI as a driving force rather than a disruptive threat.

Because I simply don't see a world today where we'll be searching for our homes via ChatGPT. I might be wrong. I might be wrong, but it does n't seem like that's the direction we're headed in, at least for the next two years.

I mean, even if we were , you'd probably have a link to Zello because, yes, otherwise how would they get all the necessary data that's available on Zello, which is again their strength?

So, yes, well, if there's a link, that's fine. But it's interesting, I suppose, that many of the so-called competitors who were big two years ago are no longer around. I remember, Opendoor was probably one of the names that came up.

Redfin was another name. I don't know if they still exist. A partnership with Redfin. I think Opendoor is in big trouble, but the other company that has made significant changes is homes.com, owned by Costar.

They've kind of tried to create a Zillow-like business model because they own apartments.com and homes.com. So I think they just said, "Hey, why don't we jump in and do a better job than Zillow?"

"And that was a pretty big failure . They didn't get the user growth they needed. They were losing tons of money. An activist investor came along and said to them, 'Hey, what are you doing wasting all this money trying to compete with Zello?'"

"So, they've actually pulled back, and I think that's solidified Zillow's position as a core aggregator. Now, if you can do that with homes and rents, that sounds like a great position.

I mean, they own homes.com and apartments.com. Those two domains are probably worth a fair amount of money. You might think so, but they've never really built a solid business out of it.