Felix Narhi of PenderFund Capital Management presented his in-depth investment thesis on The Zillow Group (US: Z, ZG) at Wide-Moat Investing Summit 2019.

Thesis Summary:

Zillow is a founder-led, mission-driven, data-centric organization serving the full lifecycle of owning and living in a home. The historically change-resistant real estate industry is at the early stages of being disrupted by technological convergence, new business models and possibly regulatory changes. The industry’s profit pools will gradually shift to the organizations that provide the best seamless experience/value for the consumer. Zillow is by far the largest and most influential online platform in the industry. Importantly, Zillow has earned the trust of the consumer and owns the customer relationship. Yet, the monetization gap relative to the value it provides to both consumers and the industry ecosystem is among the widest of all the major online aggregators. Zillow’s journey to close that gap has just begun.

Co-founder Rich Barton recently returned to the CEO role to radically improve the customer experience and to tap into a vastly larger addressable market. The organization is moving beyond its ad-centric agent model to get closer to the actual transaction. Specifically, Zillow is racing to gain scale in the nascent iBuyer industry, where companies are buying and selling homes directly from and to consumers. Ultimately, the plan is to bundle other high-margin related ancillary services, like mortgages into a seamless, one-stop home shopping experience. The stakes are high because this is an industry where scale matters and may have “winner takes most” dynamics.

Zillow could be the end game winner, with attractive bundled unit economics, a sizable share of the industry’s profit pool and an enterprise value well in excess of today’s valuation. In the meantime, most of the profits from its legacy ad business will be reinvested into pioneering strategies to win the end game. Despite its proven management team and enviable starting position, execution risk is real. Zillow is a publicly-traded VC-style investment, where the potential upside over a multi-year time horizon is worth the risk.

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About the instructor:

Felix Narhi is the Chief Investment Officer of Pender and the Portfolio Manager of the Pender US All Cap Equity Fund and the Pender Strategic Growth and Income Fund, and Co-Manager of the Pender Value Fund. Prior to joining Pender in July 2013, Mr. Narhi spent over nine years at an independent and value-oriented investment firm in Vancouver. Mr. Narhi holds a Bachelor of Commerce degree from the University of British Columbia. He earned his Chartered Financial Analyst (CFA) designation in 2003 and is a member of CFA Vancouver. Mr. Narhi advocates a business-like approach to investing. Sound investing is the process of determining the value underlying a security and then buying it at a considerable discount to that value. The greatest challenge is to maintain the necessary balance between patience, emotional fortitude and discipline to only buy when prices are attractive and to sell when they are dear, while avoiding the short-term “noise” that consumes most market participants.