An Interesting Take on Zillow

Barbara Gray, Brady Capital Research
Barbara Gray, Brady Capital Research

Consider this a Easter present to my readers. Sort of like a colorful egg, hidden amidst thorns and brambles of Gen-Y DOOOOOOM that I get into sometimes.

Barbara Gray is one of those friends one makes on the Internet in the 21st century. That is, I’ve never met her in person, and with whom I haven’t yet gotten drunk  — I know because there is no recollection of belting out More Than A Feeling at a karaoke with her. But we have had a number of really interesting conversations about the real estate industry over the past several months.

One reason I enjoy talking to her is that she’s looking at the industry from an outsider’s point of view. You see, Barbara is an equity analyst and the founder of Brady Capital Research based in Canada, and she has been following Zillow for some time. She has a take on Zillow that I think is interesting and more-or-less unique.

Well, she’s finally published her report on Zillow, and I thought those of you interested in one person’s take (to be fair, a very heavily researched and educated take) might want to check it out. So, make the jump for the Executive Summary, and a link to her site where you can download the full report. [EDIT: Barbara just emailed me saying there’s no way to download the report from her site, but that if you email her at, she’ll send you a copy in PDF at no charge.]

Zillow: Disrupting the $75 Billion Agent-Centric Machine

That’s Barbara’s title, not mine. And here’s the Executive Summary:

We recommend Zillow Inc. (Z-NASDAQ) as a BUY with an initial target price of $120.00. Zillow offers investors a unique opportunity to take a stake in an early-stage online residential real estate marketplace company that is disrupting the $75 billion realtor-centric machine through its greater purpose to “lead a revolution in online real estate to empower consumers”. In less than a decade, Zillow has created a thriving ecosystem with significant scale and influence by generating Positive Social Capital (i.e. shared value and positive externalities) for its community of 800-plus employees, over 70 million unique visitors, 650,000 real estate agents, four leading media distribution partners, and the U.S. government.

Zillow will be able to sustain its competitive advantage through its following four generative economic moats:

  1. Low Cost Producer: Visitors to Zillow’s listings provide it with an extremely low-cost and highly scalable source of raw material (i.e. home impressions).
  2. Intangible Assets: Zillow is creating the “long tail” of the Real Estate Marketplace by democratizing the tools of production and distribution and connecting supply with demand by facilitating trust and reducing search costs for consumers.
  3. High Switching Costs: Zillow’s freemium aspects and social value creation opportunities of advocacy, learning, and collaboration create stickiness.
  4. Network Effect: Zillow’s structural asset appreciates in value as a result of the network effect.

Zillow is poised to start capitalizing on its structural asset base (database on 115 million homes, 650,000 Real Estate Agent Professional Profiles, 37 million pieces of user-generated content). Although Zillow appears unthreatening with nascent business lines producing under $200 million in revenue, the revolutionary power of its radical consumer-centric model makes it a ubiquitous disruptive force to the traditional realtor-centric machine.

Unlike most advertising-dependent social networking plays, Zillow’s path to monetization is through client acquisition for its subscriber base of Platinum Premier Agents. We forecast its revenue will grow at 30% CAGR over the next decade, from $130 million last year to $1.5 billion by 2022 through increasing its Platinum Premier Agent subscriber base (from 40,000 to 180,000) and its average revenue per agent (from $3,650 to $8,000). Our $1.5 billion forecast is conservative as it implies a 19% share of the $7.8 billion spent on advertising and under 3% of the $75 billion generated in commissions.

The attractiveness of Zillow’s unique business model is its client acquisition platform. Zillow has significant pricing power given the price elasticity of demand for Platinum Premier Agents is the ROI. Even more exciting is the long-term potential for Zillow to improve its economics by shifting from advertising to a market-based dynamic pricing model. This creates significant opportunity for value creation given Zillow’s high valuation sensitivity (every 1% increase in our pricing assumption adds $5 per share in value to our discounted cash flow valuation).

I’ll leave my personal take on the report for a later post, but I’ll say that I’ve never seen a treatment of Zillow under the concept of “Positive Social Capital”. Of course, one can apply the same logic to other portals in our space… if you like the concept, at least….

Plus, I know I haven’t seen a report yet forecasting $1.5 billion — with a B — in revenues for Zillow. So there is that.

Anyhow, check it out if you’re into that sort of thing. And I believe you can download the full report from the Bradycap website.

Happy Easter, everybody!


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Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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