This Quintessential Growth Stock is a Buy

The United States’ white-hot housing market is spawning some eyebrow-raising knock-on effects up and down the market.

Take lumber futures, for instance. They recently hit a record $992.40 per thousand feet – a 49% climb in about three weeks.

Those are tempting gains, no doubt, but I’m not here to suggest we start trading lumber futures – though it certainly draws a line under the power of this boom.

As always, I think the serious money is in a decidedly more high-tech approach. The profits in the stock I’m about to name should put lumber’s double-digit gains in the shade.

These folks have already grown earnings 248% during the boom, but as we speak, the company is executing a savvy move to reposition itself to capture an even bigger chunk of the housing bull’s windfall profits…

This Boom Is Generating Staggering Numbers

The coronavirus pandemic has sparked an immense housing and remodeling bull market.

Millions of people are spending more time at home and, perhaps tired of the same four walls, are staging more DIY and home improvement projects themselves, as evidenced by Home Depot and Lowes’ performance in 2020.

But on an even bigger scale, homeowners are looking to relocate now that telecommuting has become the norm. Others see historically low interest rates as a reason to pull the trigger, making real estate an appealing alternative investment “kicker” to high stock market returns.

Whatever the motives, according to the National Association of Realtors, sales of existing homes in January grew by 0.6% from December. That might not sound like a lot, but you have to bear in mind economists expected sales to fall by 2.4% instead.

So, while the month-to-month increase in January sales wasn’t large, the annual increase tells the true story. At 6.69 million homes sold, adjusted for the season, this January’s sales were a stunning 23.7% higher than January 2020.

What this means is a housing market the likes of which we haven’t seen since 2006. But a similar 2009-style housing crash is unlikely to happen again. The quality of mortgage debt is higher, buyers have higher credit ratings these days and are generally more liquid, and realtors report it’s not uncommon for folks to show up with 30%, 40%, and even 50% of the purchase price to put down.

Here again, the pandemic is changing the game; people are buying more real estate, but increasingly more and more of that dealing is done online. Even before the pandemic, the trend in U.S. real estate was toward e-commerce. As early as 2016, 78% of real estate ad spending was happening online, and that share is still growing.

Most of it is going to this “home tech” company…

This Is a Pure Play on the Entire Housing Boom

These are just a few reasons to own the undisputed leader in this space: Zillow Group Inc. (NASDAQ: ZG). Zillow’s name is rapidly becoming a verb in the same vein as “Uber” means to call a ride or “Google” means to search the Internet. In fact, more people use Google to search for “Zillow” than for “real estate.”

But brand awareness isn’t everything.

The company is by far the largest e-commerce player in real estate, with web traffic to Zillow’s websites being about three times higher than at Realtor.com, the closest competitor. Together, the five Zillow Group brands account for almost two-thirds of total real estate web traffic, and almost three-quarters of mobile real estate traffic.

There’s just no competition here. And the firm’s “Zillow 2.0” initiative aims to keep it that way.

“Zillow 2.0” Is a One-Stop Shop for Homes

As anyone who’s done it knows, buying and selling a house is a pain.

Not only do you have to find the thing, tour it, get a mortgage, an inspection, close the deal, etc., but even worse, each step often requires a new person or organization you have to deal with, whether it’s a real estate agent, inspector, mortgage lender, appraiser, insurer… The list goes on and on.

Zillow 2.0 will simplify all that. It’s using technology and its existing tech and “Big Data” know-how to expand its capabilities and offerings, improve user experience, and capture more housing-boom profits.

The firm already knows a bunch about the house buyers, sellers, real estate agents, and the houses themselves. Using that information, Zillow will integrate all the adjacent service providers into its platform, making the house-buying and selling process a straight path that begins and ends with Zillow.

In early February, to take just one example, Zillow acquired ShowingTime, the leading virtual-tour software platform for real estate. For $500 million, Zillow gets a hugely popular platform that makes virtual house tours easy to set up and schedule for buyers, sellers, and real estate agents.

The kind of integrated, smart offering that Zillow 2.0 is about to make a reality will require some advanced data processing behind the scenes. After all, apps like Uber, Amazon, Airbnb, Carvana, and others have shown us that “magic on demand” is possible, even with complicated purchases, like buying a car.

That’s why Zillow has moved into buying and selling homes itself.

Not only is this a profitable part of the business, but it also pressures other real estate agents into following suit. They simply have few other choices – work with Zillow… or go overlooked.

Of course, little of this would even be possible without mortgage lending, and the boom has meant this segment is growing by double digits – nearly $4 trillion in 2020.

Buyers could always see an array of lender offers through Zillow’s site, but now that Zillow owns Mortgage Lenders of America – a business it picked up for $65 million – it can offer extremely competitive financing of its own through its new Zillow Home Loans division.

And to make all the data from different service providers across several sectors fit together and make sense to the users of Zillow, the company has been investing heavily into machine learning.

By crunching 15 years of data on its own estimates of the market value of houses, Zillow’s machine learning also lets the firm price the houses it buys and sells itself properly, protecting it during turbulent times for the market.

This Is the Stock for Maximum Housing Boom Gains

From its “COVID-19 Crash” low of around $25, ZG shares have ridden the pandemic-era housing boom to highs of $203 – more than 782%, or better than ten times what the broader market has done.

It’s natural to wonder whether that growth is sustainable, but in Zillow’s case, the answer is a resounding “yes.” This quintessential growth stock had seen earnings lagging its sales growth rate of 61% a year.

But last quarter, Zillow demolished all expectations with a 258% boost in earnings.

If we were to be extremely conservative and project continued growth of just a tenth of that figure, we’d still see a double in less than three years. Of course, the real-world performance of the company suggests that nice payday will arrive long before 2024.

Ultimately, Zillow stock is a buy because its high-tech approach is perfectly suited to the needs and trends of the times; that’s the key to profitable investing in any era.

— Michael A. Robinson

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Source: Money Morning