Zillow Group (NSDQ: ZG, NSDQ: Z) is the pioneer of online real estate databases. Is this hot Internet stock a smart buy in 2019 or will it cool off with the rest of the housing market?

The question occurred to me lately, as I assist my millennial daughter Jennifer in her search for a house. She’s a first-time homebuyer and, as the mother of twin infant boys, she yearns for her piece of the American dream.

My recent use of home-buying search engines on her behalf made me wonder: do these sophisticated tools present investment opportunities?

Let’s see if Zillow is on a long-term trajectory for growth or whether, like many headline-grabbing technology stocks, it faces a day of reckoning.

What Is Zillow?

Founded in 2006, Zillow Group (market cap: about $6 billion) is an online database real estate company. The ticker symbol ZG denotes Class A shares; Z is for Class C shares.

Zillow Group contains data on more than 110 million homes across the U.S. Its vast database provides value estimates of homes, value changes of each home within requested time frames, aerial views of homes, and prices of comparable homes in the area.

Based in Seattle, Zillow also provides essential statistical profiles of homes, such as square footage, the number of bedrooms and bathrooms, yard size, etc. You can get data on whether the value of the home has changed because of improvements or renovations. Zillow even provides data on homes that aren’t for sale, allowing users to put their searches into context.

Among all online search tools, Zillow carries the most thorough history of a home’s transactions, which is useful when negotiating price with the seller. Zillow derives its data from a broad range of sources, including multiple listing services (MLS), public records, real estate agents, homeowners, and tax assessors.

Zillow Group’s portfolio of consumer brands includes such names as Zillow, Trulia, StreetEasy, HotPads, Naked Apartments, RealEstate.com, and OutEast.com.

Zillow’s online and mobile search tools, as well as its smartphone app, let users search for property and view estimated property values for free. It’s also free to list a home for sale by owner or agent and to list a property for rent. Zillow makes money by charging agents and property management companies to advertise their listings.

Zillow also charges for its “Premier Agent” websites, which include free premium designs, integrated MLS search and a domain name. Real estate agents pay Zillow based on the number of ad impressions delivered to users in specified zip codes.

In 2015, Zillow created a non-voting Class C stock that was divvied up between its Class A and B shareholders, who got two shares each of the new stock for each share they owned.

The C shares trade under the old “Z” ticker on the Nasdaq exchange, while the A shares currently trade as ZG. The company uses the newer stock to make acquisitions and compensate executives. The move, not uncommon among technology growth companies, constituted financial engineering that has no effect on the company’s fundamentals.

The decision to issue different classes of stock is usually made to concentrate voting power within a tight group of insiders, to provide flexibility in decision making. Different classes of common stock typically carry the same equity interest in a company, as is the case with Zillow.

How Has Zillow Group Stock Performed?

• Over the past 12 months, Zillow Class A (ZG) shares have lost 29.7% whereas the S&P 500 has lost 9.7%.
• Over the past two years, ZG has lost 19.1% compared to a gain of 7.5% for the S&P 500.
• Over the past five years, ZG has gained 7.1% compared to a gain of 32.8% for the S&P 500. See five-year price chart:

How Has Zillow Performed In 2017/2018?

• In 2017, ZG gained 9.9% compared to a gain of 19.4% for the S&P 500.
• In 2018, ZG lost 26.5% compared to a loss of 7.4% for the S&P 500.

Who Are Zillow Rivals?

Redfin (NSDQ: REDFN)

In addition to providing brokerage services and an online real estate database of homes for sale, Redfin puts online all of the relevant documents as soon as homebuyers have signed a contract. This allows homebuyers to forgo cumbersome and expensive faxing and photocopying.

Most real estate agents are independent contractors, but Redfin’s real estate agents are employees. Quality-of-service ratings from customers are used to calculate their level of commission, which makes them highly motivated to meet customer needs. Redfin’s listings come from the MLS, which makes them up to date.

Realtor.com (private)

Realtor.com is the official listing site operated by the National Association of Realtors (NAR). This site pulls data on over 900 MLS sources to provide about 3 million listed homes and land plots, representing 99% of MLS-listed properties.

Realtor.com allows homebuyers to browse home photos, get updated listings in real time, driving directions, etc.

That’s all fairly basic, but what Realtor.com lacks in specific features it more than makes up for in sheer scope. Because of its direct relationship with NAR, Realtor.com has more homes for sale nationwide than any other online search tool.

Craigslist (private)

This well-known classified advertisements site can help with home searches. Navigate to the Housing category and click the “Real Estate for Sale” section. Using the tabs at the top, you can target your search by state, city and county. Then narrow your search by price range, as well as key words tied to neighborhood, number of bedrooms, square footage — any parameters you choose.

Craigslist is a broad-brush approach that homebuyers often use to supplement the above online search tools.

Will Zillow Group Go Up In 2019 (Should You Buy)?

Homes are the largest U.S. household asset, far more widely distributed than stocks. Before the emergence of online search tools, prospective homebuyers would have to drive around neighborhoods with a real estate agent, seeking “for sale” signs. You still have that option, but the Internet turbocharges the process.

According to the NAR, about 90% of homebuyers now search online looking for homes. There’s been a proliferation of web-based search tools to find the right home, at the right price and in the right neighborhood. You can even take “virtual tours” of homes that particularly interest you, without having to get out of your chair.

Through free, downloadable apps, you can even use these online search tools on your smartphone. NAR reports that 27% of homebuyers found their homes through a mobile app. You can set-up alerts indicating when a new property that meets your specifications has come onto the market.

These online search tools empower you to do your own homework and cover miles of territory, at your speed and convenience. Now, instead of agents sending you listings, you can send listings to them.

The digitization of the home-hunting process hasn’t made real estate agents obsolete; it has merely transformed their roles from gatekeeper in charge of listings to the value-added role of adviser and negotiator.

Because of Zillow’s scope, text-operated mobile version, and integrated Yahoo Maps capability, the site and its ancillary offerings are considered the online search “gold standard” in real estate.

Zillow gained a major competitive advantage, when it bought rival Trulia in July 2014 for $3.5 billion.

Trulia uses a matrix of thermal maps that allows homeseekers to gauge factors such as crime, schools, police and fire services, availability of shopping, etc. Interactive maps also allow users to calculate driving, commute times and traffic patterns. Users can even determine the likelihood of a natural disaster, such as a flood, hurricane or earthquake.

Trulia allows users to search for homes by ZIP code or metropolitan area. Based on your search history, Trulia can send you alerts on appropriate homes that have come onto the market. The site also provides home price trend statistics, which depict how the price of a home has changed over a period of time. It compares that house price with comparable homes in the same ZIP code.

American homeowners might not actually be listing their homes for sale — but they want to. Why? Because it’s a tale of two markets in the U.S., with home prices rising in some markets (especially in expensive coastal markets) and falling in others. As the once-hot housing market cools, homeowners just aren’t sure they want to let their properties go.

The Great Recession took such a heavy toll on the housing market that homeowners seem to be okay with waiting while their homes regain lost pricing value. Soft housing data in recent quarters is adding to the uncertainty.

In such a conflicted real estate market, how can investors make money on the housing sector, even with prices high and sales transactions low? One way is to choose an industry stock that makes money when homeowners even think about selling their property.

That’s where Zillow pops into the picture. Besides its standard, and increasingly profitable Premier Agent, Mortgage Marketplace and Zillow Rentals services (primarily geared toward real estate and lending professionals), Zillow also caters to a growing number of buyers and sellers who seek more information on the housing market before pulling any triggers.

That leads to tens of millions of clicks on Zillow’s site, which is manna from heaven for advertisers, real estate firms and mortgage lenders.

This video explains how Zillow works for end users:

One valuable Zillow tool is the Zillow Home Value Index (ZHVI), a smoothed, seasonally adjusted measure of the median estimated home value across a given region and housing type.

Overall, home prices have significantly recovered from the massive collapse of several years ago. Demand for information about the latest available properties continues to grow rapidly, even as interest rates rise, especially now that people are more connected via smartphones and other mobile devices than ever before.

Zillow shares popped higher in late 2018, after Zillow co-founder and executive chairman Rich Barton spent $19.2 million buying the company’s Class C and Class A shares. He did so in the wake of Zillow’s third-quarter 2018 operating results. Zillow delivered a $492,000 quarterly net loss compared to a $9.2 million gain in the same period a year ago, disappointing Wall Street and initially hammering the stock.

The tech sector’s overall swoon has been another headwind for Zillow. But Barton wanted to express his long-term confidence in Zillow and investors usually respond favorably when an insider puts “skin in the game.”

Zillow shares have since rebounded somewhat. It’s also worth nothing that Zillow’s third quarter actually showed bright spots, such as a 13% increase in visits to 1.9 million and a 22% year-over-year increase in revenue to $343.1 million. This positive momentum should continue in 2019.

Will Zillow Group Go Down In 2019 (Should You Sell)?

Let’s examine the bear case.

The major threats to Zillow are macroeconomic. The U.S.-China trade war could torpedo global economic growth and with it the housing sector. Investors last year shrugged off President Trump’s trade war, assuming his protectionism was largely a blustery bargaining stance. This optimism has proven naive in 2019, as tariffs begin to bite and multinational corporations downgrade earnings guidance due to escalating trade sanctions.

Tariffs are raising input costs for home builders; these costs are passed along to consumers. Rising inflation could strangle consumer spending and with it home buying in 2019. To quell inflation, the Federal Reserve is continuing its policy of monetary tightening, which makes mortgages more expensive and dissuades buyers.

Zillow enjoys a history of robust revenue growth, but it continues to have difficulty in posting a consistent profit, as reflected by recent quarterly operating results.

To be sure, Zillow is a technology disruptor. But as history has shown time and again, a competitor with better technology could unexpectedly come along and disrupt the disruptor.

Overall Zillow Group Forecast And Prediction For 2019

On Zillow, I’m siding with the bulls.

As the broader stock market continues its roller coaster ride in 2019, Zillow is a compelling investment story. Zillow knows what’s happening now, and knows what will happen one year from now in the U.S. residential real estate market.

The stock’s 12-month forward price-to-earnings ratio is high at 75, but the multiple reflects justified investor enthusiasm. The average analyst expectation is that Zillow’s five-year earnings growth will reach 93.7%, on an annualized basis.

Zillow also sits on a cash hoard of $1.6 billion, with total debt of only $715 million, all of which gives the company ample wherewithal to invest in new technologies and pursue additional strategic acquisitions. Zillow has strong cash flow and top-line growth; organic investments should eventually enhance the bottom line.

Data is king in the global economy, which means Zillow Group possesses a highly valuable commodity. Investors should find a home for Zillow in their portfolios.

John Persinos is the managing editor of Investing Daily.