Zillow (ZG) November 14, 2018 Information Technology Stock Rating No Action

Transcription

1 The Henry Fund Henry B. Tippie School of Management Jason Woodruff Zillow (ZG) November 14, 2018 Information Technology Stock Rating No Action Zillow Group is a highly recognizable name in the real estate industry that has historically generated revenue through the sale of advertisements to real estate professionals, such as real estate agents and mortgage lenders. Zillow is attempting to build off this brand recognition and industry knowledge to buy and sell houses, but it is yet to be seen whether this shift in priority will work. The lack of information and historic data in this industry makes Zillow Group a highly speculative investment, which is driving our HOLD rating. Drivers of Thesis Zillow Group made the vast majority of its 2017 revenues through the sale of advertisements but remains unprofitable, and growth in website traffic has slowed to 8%, down from 62% in We project that growth will continue to slow. Zillow Group is committing to a new business segment that will buy and sell houses but has yet to show that it is a viable business model. They have bought 168 houses and sold 36 with a Gross Margin of 6.6% and an operating margin of -145%, causing concern for when they will become profitable. Risks to Thesis Investment Thesis Target Price $34-36 Henry Fund DCF $35 Henry Fund DDM $12 Relative Multiple $36 Price Data Current Price $ wk Range $ Consensus 1yr Target $39 Key Statistics Market Cap (B) $6.28 Shares Outstanding (M) Institutional Ownership Five Year Beta Zillow s strong brand recognition makes it well positioned to capture market share in this new, flat-rate home buying and selling industry. Dividend Yield N/A PEG Ratio 2.76 EV/Revenue 0.00 EV/EBITDA Price/Sales (TTM) 6.54 Price/Book (mrq) 2.63 Profitability Operating Margin 0.63% Profit Margin -7.54% Return on Assets (TTM) 0.14% Return on Equity (TTM) -3.27% Revenue per user (or visitor to a Zillow-owned website) has continued to grow at over 20% for the past two years. If they continue to add value to real estate agents their advertising business should make them profitable in the next 1-2 years. 8 6 Zillow Industry Sector 6.5 Earnings Estimates Year E 2019E 2020E 0 EPS ($0.88) ($1.22) ($0.51) ($0.24) ($0.08) $0.25 Price /Book growth 142.4% 38.6% -58.2% -53.2% -66.6% % 12 Month Performance Company Description Price /Sales 3.6 Zillow Group is an online provider of real estate information. They own a number of consumer brands, such as Zillow, Trulia, and Hotpads, as well as real estate service brands like dotloop. Historically, Zillow Group has made its money through the sale of advertisements on its websites, but they are entering into the business of buying and selling homes. Important disclosures appear on the last page of this report.

2 EXECUTIVE SUMMARY Zillow Group has seen massive growth in website traffic and recognition over the past 5 years and is now attempting to leverage their brand and industry expertise to become a large, online, real estate agent. The forecast for the housing market is strong, but this new segment fundamentally changes Zillow Group s capital structure and business model. Zillow s advertising business has continued to grow, although growth in traffic on their consumer websites is slowing and they are not yet profitable. Due to the speculative nature of their new home-buying segment, and the lower outlook on their advertising business, we see only a 9% upside and high volatility with this investment. Therefore, we suggest NO ACTION on Zillow Group. COMPANY DESCRIPTION Zillow Group owns a portfolio of online products and brands aimed at helping people in every stage of the home lifecycle, whether they are looking to buy, sell, rent, or finance. Their flagship product, Zillow, is a free-toconsumer searchable database of over 110 million homes that provides a unique and detailed view of the property as a whole everything from square footage to quality of local schools. This is gathered largely from public records, but homeowners are able to make updates and add details to their home s profile. Zillow Group s portfolio is made up of 14 subsidiaries, seven are consumer facing and the other seven are designed to solve back office problems in the real estate industry. Historically, all their revenue has been two major categories: Marketplace and Display, with Marketplace being further broken down into Premier Agent, Other Real Estate, and Mortgages. Moving forward, Zillow Group plans to lump all these together into a new category called Internet, Media & Technology (IMT), and introduce a new segment called Homes. Homes was first included in the Zillow Group s Q2 earnings release for The following chart breaks down all 2017 revenue, totally $1.08 billion, which will all be classified as IMT in the future. 7.48% 15.32% 6.47% Source: Zillow Group K Internet, Media & Technology (IMT) While small portions of the Other Real Estate and Mortgages sections include revenue from nonadvertising sources, substantially all the revenue generated by all IMT segments comes from selling advertising. They subsection this segment to indicate who the advertiser is. Due to frequent changes in the way Zillow Group has reported earnings, it is difficult to forecast any single segment. We forecasted each IMT segment based on website traffic, adjusting future revenue-per-user for individual sections based on management guidance and outside research. Historic Growth Revenue Decomp % Premier Agent Other Real Estate Mortgages Display Growth in IMT revenue is spurred by website traffic and revenue per user. Zillow Group saw very high growth in website traffic in 2014 and 2015, but recent increases in revenue have been primarily driven by increased revenue per user. Page 2

3 70% 60% 50% 40% 30% 20% 10% 0% Source: Zillow Group 10-K , HF Projections Premier Agent The Premier Agent category was the largest contributor to revenue in 2017, bringing in $761.6 thousand. The Premier Agent program allows real estate agents to manage and grow their business through a free Customer Relationship Management (CRM) that tracks all client information and interactions, a free analytics dashboard, and a self-service tool that allows them to purchase advertising space. We have forecasted that this category will remain the largest contributor to revenue throughout our 7-year forecast horizon and will make up 52.0% of Zillow s total revenue in This sharp decline in percentage of total revenue is the result of significant growth in Zillow s new Homes segment. The Homes segment will, by nature, always be a much lower margin business than advertising revenue generated by the Premiere Agent category. Other Real Estate This category consists of advertising revenue generated by property managers seeking renters and home builders showcasing their new available inventory to home shoppers. Mortgages Advertising Revenue Growth Metrics E 2019E 2020E 2021E Monthly User Growth Revenue per User Growth This category includes advertising revenue from mortgage lenders, as well as revenue from lead generation software they sell to mortgage lenders on a subscription basis. Display Display revenue is generated by advertisers who do not fall into other categories, meaning they are not real estate agents, property managers, home builders, or mortgage lenders. The majority of these advertisers are still in the real estate industry, such as real estate brokerages or home service providers, but this also includes non-industry advertisers such as telecommunications and automotive companies. Homes Homes is a new business segment as of Q If a home owner is interested in selling their home, Zillow will quote them a price, and the owner can choose whether to accept there is no negotiation. If an agreement is reached, an inspection occurs, the owner gets to choose the closing date, and the deal is closed in cash. Zillow charges between 6-9% depending on the real estate market, expected rehab costs, and expected carrying costs [2]. Zillow believes there is a large group of homeowners who are willing to pay higher fees if Zillow removes the hassles of selling a house. Zillow Group has issued $750 million in convertible notes and secured a $250 million line of credit to fund this new segment. Management has said that through use of this debt, they expect to limit their equity exposure to 15% on any single house. Zillow first reported metrics and financials on this segment in their Q earnings report. During the 3 rd quarter they purchased 168 homes and sold 36. Their average purchase price was $258,000 and their average selling price was $286,000. They had an additional $30 million in houses under contract, which we expect represents additional houses. Management has suggested they are trying to break even in the short term and targeting 1-2% net profit in the long-term [2]. Homes had a net margin of -145% in Q We forecast the Homes segment to grow to 28.4% of Zillow s revenue in the next seven years, and that it will become profitable in Much of this segment s profitability will be determined by how long they hold a house in inventory before reselling they are targeting a holding time of under 90 days from purchase to resale [3]. The restructure of how they report earnings and the amount of capital raised shows that management believes this segment is the future of Zillow. While their Page 3

4 recognizable brand, industry knowledge, and proprietary home analysis make buying and selling homes a natural extension, this is a fundamental change to their business model and capital structure. We believe this shift is a good decision by management, considering that Zillow was failing to gain profitability from their advertising and a horizontal move by Google or Facebook into real estate advertising could severely impact them, but makes Zillow a very risky investment. There are multiple companies that offer similar homebuying services, such as Opendoor, Offerpad, and Knock. All three are privately held. Quarter 2 Earnings RECENT DEVELOPMENTS Acquisition of Mortgage Lenders of America Before their Q2 earnings Zillow Group announced the acquisition of Mortgage Lenders of America. They hope that owning this mortgage company will help them streamline the process of selling homes through their Zillow Offers program, as securing a mortgage is frequently the most complicated part of selling a home [3]. The deal is expected to close in Q4-2018, and the terms of the deal have not been disclosed. Update on Zillow Homes In the earnings call Zillow said they have had more than 10,000 offer requests but had only bought 19 homes and sold 9. They will not report the financials associated with Zillow Offers until the Q3 earnings but lowered their forecasted range of homes available for resale in 2018 to from and gave revenue guidance of $20 - $40 million. They did not give any guidance on what the expected margins. Investor Reaction The stock dropped 16% after earnings were reported. This is due to a mixture of the acquisition announcement and poor initial numbers/ lack of transparency on Zillow Homes. Quarter 3 Earnings Changes to Premier Agent Zillow made significant changes to their Premier Agent referral program, limited the number of leads sent to agents but increasing the quality. The result was increasing the rate that Agents and leads successfully connect from 49% to 93%, however many agents were unhappy with reduced number of leads and have stopped advertising on Zillow. This increased churn caused Zillow to come in below management guidance on their Premier Agent segment. We believe these changes were important and will benefit Zillow in the long run as they improve customer experience and trust with the Zillow brand. Homes Zillow Homes has received 20,000 price requests which management has said is far above expectations. This number is not very meaningful, however, until we have stronger data on the conversion rate of a price request. Right now, roughly 1% of price requests result in Zillow purchasing a home. Investor Reaction Zillow stock dropped more than 21% after earnings release after lowering 4 th quarter guidance and giving an update on the Homes segment. Online and Mobile INDUSTRY TRENDS As with every industry, there is a growing trend towards online and mobile. A 2017 report shows that 44% of people start the home-buying process online and 95% of home-buyers did at least some online research. Among millennial home buyers, 58% found their home on a mobile application [4]. Millennial Home Buyers Millennials have delayed buying houses more than previous generations, but 86% say they have plans to buy a house in the next 10 years, with 52% saying they plan to in the next 5 years [5]. Page 4

5 Of millennials who have put off buying a house, 85% said that student loan debt was preventing them from saving a down payment [5]. remaining corporations to integrate vertically and offer more services/benefits to advertisers. There are three main competitors in this industry: Zillow Group, CoStar Group, and Redfin. Profit Margin, ROA, ROE % 15% 10% 5% 0% -5% -10% -15% -20% 16.3% 7.6% 5.1% 0.1% -7.5% -3.3% -5.7% -7.8% -16.3% Zillow Group CoStar Group Redfin Source: Statista MARKETS AND COMPETITION Comparing Zillow Group to competitors is difficult because of the large number of acquisitions that have happened within the real estate advertising industry and lack of public competitors in the home buying/selling industry. Zillow has a fundamentally different business model from most real estate brokerages, so while they operate in the same industry, it is difficult to make meaningful comparisons on most metrics. Zillow Group s most direct competitors have either been acquired by large corporations, as is the case with Realtor.com being bought by News Corp, or have been acquired by Zillow Group itself, such as Trulia. Advertising Industry Analysis The real estate industry is unique because of how expensive houses are compared to other life purchases. Due to the size of the purchase there are many ancillary industries such as issuing mortgages and real estate agents that have grown up. Advertising these ancillary services online is where Zillow Group has historically sat. This space has had many acquisitions, reducing the number of competitors. This has also allowed the Source: Yahoo Finance Profit Margin ROA ROE CoStar Group: CoStar Group focuses on commercial real estate and has a large presence in both the United States and the United Kingdom. The majority of their revenue comes from subscription-based services that give access to commercial real estate marketplaces and analytics. CoStar benefits from large and long-term relationships with corporations. CoStar Group is a large and stable presence in the industry that has a firm hold of the commercial real estate market. They are profitable reporting a net income of $123 million in Their stock has gain 30% on the year, and we believe this is not reflective of their underlying value. Redfin: Redfin is an online real estate brokerage that charges a commission fee upon the sale of the home. They had their IPO mid-2017 and remain unprofitable. Redfin competes with Zillow Group as an alternative way to get information on houses in your neighborhood, and as an alternative way to buy/sell your home. Redfin works with local realtors and not available everywhere. Google & Facebook: Zillow Group also competes for advertising revenue from digital advertising giants Google and Facebook. While Zillow Group provides a targeted audience of people looking at housing, Google and Facebook are also able to provide targeted advertising. Page 5

6 We see these companies as the largest threat to Zillow Group s advertising platform, because of their scale and technical expertise especially Google with their robust Maps platform. However, due to the significant difference in scale and industry, we have not compared Zillow s metrics to either company. Home Buying/Selling Industry Analysis Zillow group is interested in being the middleman between buyers and sellers of homes because of industry size. In their quarterly update, Zillow says that the housing market generates $1.8 trillion in transaction value each year [2]. However, the there is a very high threat of substitutes namely, the traditional method of using a realtor to sell a home directly to the end buyer. They believe that the process of buying/selling homes is frustrating enough that consumers will be willing to pay a premium, 6-9% of sale price, to avoid the hassle. There is also strong competition in this market, but most competitors are privately held, making analysis difficult. They are all less than 10-years old and operate largely in the same cities. They have raised $1 billion, including $400 million from SoftBank in September They have between employees [6]. Offerpad: Offerpad was founded in 2009 and also offers a very similar service to Zillow Home. Offerpad operates in 8 cities and boasts thousands of happy customers. Offerpad has raised $410 million through four funding rounds and has between employees [7]. Knock: Knock was founded in 2015 by the founders of Trulia, now a subsidiary of Zillow Group. They are unique because they will buy your new home and make any necessary repairs before listing your old one. This guarantees a seamless living transition for the consumer. Knock has raised a total of $34.5 million in three funding rounds and has between employees [8]. Analysis The amount of funding private competitors have been able to raise suggests proof of concept for this new industry, and, based on the current website ranking, Zillow seems to have a distinct advantage in terms of brand recognition. Source: Alexa.com ECONOMIC OUTLOOK Source: Opendoor.com, Offerpad.com, Knock.com, Zillow.com Opendoor: Opendoor was founded in 2013 and the service they offer is virtually indistinguishable from Zillow Home. Opendoor is operational in 14 cities and claims to have served 23,000 happy homeowners. US Fed Funds Rate Since the end of 2015 the Federal Reserve has be steadily raising interest rates the Fed Funds rate is currently at 2%. Being a pre-profit company focused on growth, Zillow Group has mainly issued equity and convertible bonds to fund their operations, meaning their exposure to interest rates is minimal. Rising interest rates will have a bigger impact if they approach the debt market to finance future operations. Page 6

7 Source: Trading Economics US Mortgage Lending Rates Fixed 30-year mortgage rates have been rising for the last 2 years along with interest rates. This is an important factor in determining the cost of home-buying and will play an increasingly important role as Zillow begins to buy and sell more homes. Source: Trading Economics CATALYSTS FOR GROWTH Zillow Group is operating in two industries: advertising and house flipping. With the current focus and direction of management, it will be hard for Zillow to grow without the house flipping business to show strong numbers. If Zillow Group performs well in the next 18 months, it will be because volume and margins from the home flipping business do better than expected. Growth in advertising will come from continued growth in website traffic and increasing revenue per user. Zillow Group must continue to deliver value to realtors for the advertising business to become profitable. INVESTMENT POSITIVES Source: Trading Economics Existing Home Sales in the US While Zillow claims their new segment, Homes, will perform well regardless of the housing market, we believe it will be heavily tied to existing home sales. This is measured by the number of mortgages being closed. Over the past 5 years existing home sales has generally been trending upwards but has taken a dip in the second half of Part of this is seasonality of the housing market. Zillow Group has multiple recognizable and trusted brands in the real estate world. There are multiple companies trying to disrupt the home-buying process, and Zillow is well positioned to do that. Zillow advertising revenue per user has grown consistently at over 20% per year. We expect this trend to continue and lead Zillow to turn a profit in the next 1-2 years. INVESTMENT NEGATIVES While buying and selling homes is a natural extension for the Zillow brand, leaning on their technical ability to value homes, it is a fundamentally different business model from advertising. Investors have very limited insight into the real cost of this new industry or consumer interest. Growth in traffic from Zillow Group s core advertising traffic has slowed dramatically since What was once thought to be a high-growth segment is slowing, and it will be slow to recover the decade of losses. Page 7

8 Revenue IMT (Advertising) VALUATION In our model we broke Zillow Group s historic business into marketplace and display, as that is how all revenue has been previously reported. Marketplace, which includes all advertising revenue from the real estate industry, has seen declining growth since We project that this will continue to grow 20-25% a year for the next four years, before slowing to 5% a year by This will be driven by increased revenue-per-user and website traffic. Display, which includes advertising revenue from nonindustry advertisers, grew by only 1.5% in With a projected increase in traffic, we have forecasted that this segment will grow at 5% per year. Management has said they aim to break even in the short term and earning a 1-2% net profit long-term. We have them turning a profit in 2020 and gaining a 2% margin by Expenses Cost of Revenue Due to the differences in business and margins, we forecasted the costs associated with the Homes segment separately from Zillow s legacy advertising business. For the IMT segment (advertising), cost of revenue was 7.9% in 2017, we have that declining to 7% in Other We have forecasted Sales & Marketing, General & Administrative, and Technology & Development to decrease as a percentage of sales overtime. This is based on the idea that there will be synergies and efficiencies created as the company continues to grow. 120% 100% 80% 60% 40% 20% 0% -20% -40% Historic & Projected IMT Segment Growth Marketplace Growth (Proj.) 2019 (Proj.) 2020 (Proj.) 2021 (Proj.) 2022 (Proj.) Display Growth Taxes Zillow has significant tax-loss carryforwards from years of unprofitability. We have forecasted that they become profitable in 2020 and begin paying taxes in 2023 after working through their tax losses. Model Selection Zillow Group has never paid a dividend, making the dividend discount model an unreliable method of valuation. Additionally, a relative valuation is particularly difficult in the situation of Zillow, as they are moving into an industry that has no public competitors flat-rate buying and selling of homes. Source: Zillow 10-K , Henry Fund Projections Zillow Homes Based on management guidance, we have forecasted $30 million in revenue in 2018, and $36.8 million in costs associated with Zillow Homes. We have rather modest views of how this service will do. We have forecasted $750 million in revenue by 2021, but only $11.3 million profit in that same year. For these reasons we are prioritizing the DCF model, which reflects research into Zillow Group as a whole, in our recommendation. KEYS TO MONITOR Understanding the margins and expected volume of Zillow Group s new Homes segment will have a large impact on the future of the company. Look for numbers on how many homes Zillow sold in their annual numbers. Zillow has been buying houses faster Page 8

9 than they re selling them, and caring homes as inventory is very expensive. Website traffic and revenue per user growth. Advertising will continue to be the core revenue driver for Zillow Group, and strong website traffic growth would help them boost their bottom line. students, or the Henry Fund may hold an investment position in the companies mentioned in this report. REFERENCES 1. Zillow Group 10-K Zillow Group Q Quarterly Update 3. Zillow Group Q Quarterly Update 4. National Association of Realtors Real Estate in a Digital Age /2017-real-estate-in-a-digital-age pdf 5. Statista 6. Crunchbase Opendoor -2#section-funding-rounds 7. Crunchbase - Offerpad #section-overview 8. Crunchbase Knock ay#section-overview 9. Alexa Information Alexa.com/siteinfo 10. Trading Economics Interest rates, US Mortgage Rates, Existing Homes Sales in US IMPORTANT DISCLAIMER Henry Fund reports are created by students enrolled in the Applied Securities Management program at the University of Iowa s Tippie College of Business. These reports provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of our students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, Page 9

10 Zillow Group Revenue Decomposition CV Fiscal Years Ending Dec E 2019E 2020E 2021E 2022E 2023E 2024E Marketplace Revenue 555, ,060 1,007,176 1,208,611 1,414,075 1,583,764 1,742,141 1,881,512 1,956,772 2,035,043 Marketplace Revenue % Growth 108.0% 40.0% 29.4% 20.0% 17.0% 12.0% 10.0% 8.0% 4.0% 4.0% Display Revenue 88,773 68,529 69,618 73,099 76,754 80,592 84,621 88,852 93,295 97,027 Display Revenue Growth % 51.4% -22.8% 1.6% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 4.0% Zillow Offers , , , , , , ,648 Zillow Offers Revenue Growth % 357.1% 240.0% 250.0% 104.0% 104.0% 104.0% Total Revenue 644, ,589 1,076,794 1,316,710 1,615,829 1,964,356 2,576,762 2,750,364 2,861,267 2,975,718 Total Revenue Growth % 97.8% 31.3% 27.2% 22.3% 22.7% 21.6% 31.2% 6.7% 4.0% 4.0%

11 Zillow Group Income Statement In Thousands of USD CV Fiscal Years Ending Dec E 2019E 2020E 2021E 2022E 2023E 2024E Revenue 644, ,589 1,076,794 1,316,710 1,615,829 1,964,356 2,576,762 2,750,364 2,861,267 2,975,718 Cost of revenue IMT 61,614 71,591 85, , , , , , , ,245 Cost of revenue Homes , , , , , , ,339 Sales & marketing 307, , , , , , , , , ,621 Technology & development 198, , , , , , , , , ,773 General & administrative 170, , , , , , , , , ,112 Other (one-time) exenses 56, , Total cost & expenses 794,208 1,039,443 1,238,668 1,324,869 1,602,171 1,886,460 2,391,969 2,468,765 2,273,163 2,364,089 Depreciation expense 13,086 13,590 15,855 21,662 25,220 36,464 55,971 78,898 74,189 96,007 Amortization Expense 62,300 87,000 94,300 47,588 40,055 36,808 32,350 5, Income (loss) from operations (149,531) (192,854) (161,874) (8,159) 13,658 77, , , , ,629 Gain (loss) on debt extinguishment - (22,757) Other income 1,501 2,711 5,385 4, ,672 6,896 9,046 9,655 10,044 10,446 Interest expense 5,489 7,408 27,517 42,002 34,959 34,008 39,144 44,599 49,379 54,102 Income (loss) before income taxes (153,519) (220,308) (184,006) (45,661) (15,629) 50, , , , ,973 Income tax expense (benefit) (4,645) 130 (89,586) , ,634 Net income (loss) (148,874) (220,438) (94,420) (45,661) (15,629) 50, , , , ,339 Weighted average shares outstanding - basic 169, , , , , , , , , ,098 Net income (loss) per share - basic (0.88) (1.22) (0.51) (0.24) (0.08) Growth of EPS 142.4% 38.6% -58.2% -53.2% -66.6% % 197.7% 55.9% 68.6% 3.5%

12 Zillow Group Balance Sheet In Thousands of USD CV Fiscal Years Ending Dec E 2019E 2020E 2021E 2022E 2023E 2024E Cash & cash equivalents 229, , , , , , , , ,453 1,083,577 Short-term investments 291, , , , , , , , , ,794 Accounts receivable, net 29,789 40,527 54,396 63,463 77,880 94, , , , ,425 Prepaid expenses & other current assets 24,016 34,817 24,590 44,424 54,516 66,274 86,936 92,793 96, ,396 Total current assets 574, , ,525 1,151,630 1,180,202 1,284,592 1,336,621 1,411,561 1,658,988 1,832,192 Restricted cash 3,015 1, Long-term investments Property & equipment, gross 100, , , , , , ,231 1,483,786 1,920,137 2,373,942 Less: Accumulated depreciation 10,444 17,068 38,005 59,667 84, , , , , ,416 Property & equipment, net 89,639 98, , , , , ,909 1,227,566 1,589,728 1,947,526 Goodwill 1,909,167 1,923,480 1,931,076 1,931,076 1,931,076 1,931,076 1,931,076 1,931,076 1,931,076 1,931,076 Intangible assets, gross 619, , , , , , , , , ,587 Less: accumulated amortization 64,636 91, , , , , , , , ,468 Intangible assets, net 554, , , , , , , , , ,119 Other assets 5,020 17,586 25,934 25,934 25,934 25,934 25,934 25,934 25,934 25,934 Total assets 3,135,700 3,149,677 3,230,517 3,551,749 3,624,908 3,860,991 4,302,100 4,790,256 5,399,845 5,930,847 Accounts payable 3,361 4,257 3,587 5,957 7,311 8,887 11,658 12,444 12,945 13,463 Accrued expenses & other current liabilities 43,047 38,427 61,373 74,245 91, , , , , ,790 Accrued compensation & benefits 11,392 24,057 19,109 28,017 34,381 41,797 54,828 58,522 60,882 63,317 Deferred revenue 21,450 29,154 31,918 42,728 52,434 63,744 83,617 89,250 92,849 96,563 Deferred rent, current portion 1,172 1,347 2,400 2,474 3,037 3,692 4,843 5,169 5,377 5,592 Total current liabilities 80,422 97, , , , , , , , ,726 Deferred rent, net of current portion 13,743 15,298 21,330 24,103 26,199 27,883 28,310 29,642 31,174 32,786 Long-term debt 230, , , , , , , , , ,704 Deferred tax liabilities & other long-term liabilities 132, ,146 44,561 30,000 15, Other non-current liabilities Total liabilities 456, , , , , , ,956 1,093,422 1,187,552 1,281,216 Additional paid-in capital 2,956,111 3,030,854 3,254,166 3,383,200 3,512,233 3,641,267 3,770,300 3,899,334 3,992,240 3,992,240 Accumulated other comprehensive income (loss) (471) (242) (1,100) (1,100) (1,100) (1,100) (1,100) (1,100) (1,100) (1,100) Retained earnings (accumulated deficit) (276,605) (497,043) (592,243) (637,904) (653,533) (602,749) (448,056) (201,400) 221, ,491 Total shareholders' equity 2,679,053 2,533,587 2,660,823 2,744,195 2,857,600 3,037,417 3,321,145 3,696,834 4,212,292 4,649,631

13 Zillow Group Cash Flow Statement Fiscal Years Ending Dec Net income (loss) 1,102 5,939 (12,453) (43,610) (148,874) (220,438) (94,420) Depreciation & amortization 7,190 12,773 23,254 35,624 75, , ,155 Facility exit charge 1, Share-based compensation expense 1,945 6,611 23,436 34, , , ,571 Loss on debt extinguishment ,757 - Amortization of discount and issuance costs on 2021 notes ,012 Impairment costs & restructuring costs ,000 Deferred income taxes (89,586) Restructuring costs , Release of valuation allowance on certain deferred tax assets - - (4,111) - (2,853) (1,370) - Loss on disposal of property & equipment ,384 3,689 5,678 Loss (gain) on divestiture of businesses, net ,899 (1,360) - Bad debt expense 594 1,227 1,907 2,529 3,235 2,681 7,349 Deferred rent 1,243 2, ,415 2,553 1,730 7,085 Amortization (accretion) of bond premium (discount) ,506 2,487 1, Impairment of certain acquired intangible assets , Accounts receivable (2,208) (3,458) (7,571) (5,979) (1,051) (13,324) (21,203) Prepaid expenses & other assets (2,882) 650 (1,543) (5,084) (761) (13,260) 10,807 Accounts payable ,497 4,634 (11,158) 856 (373) Accrued expenses 2,460 1,776 1,038 8, Accrued expenses & other current liabilities (18,384) (5,065) 19,000 Accrued compensation & benefits (4,020) 12,463 (4,948) Deferred revenue 2,391 2,530 3,910 3,058 (2,434) 7,794 2,633 Other long-term liabilities (965) 1,612 - Net cash flows from operating activities 14,826 32,298 31,298 45,519 22,659 8, ,191 Proceeds from maturities of investments 4,750 28,434 53, , , , ,227 Purchases of investments (47,772) (38,397) (236,147) (272,644) (307,658) (175,210) (407,032) Proceeds from sales of investments ,260 4,963 - Decrease in restricted cash, net of amounts assumed in connection with an acquisition ,931 1,962 - Purchases of property & equipment (7,686) (12,677) (22,047) (32,595) (54,981) (62,060) (66,728) Purchases of intangible assets (1,135) (4,073) (3,925) (11,647) (13,127) (9,662) (11,907) Purchase of cost method investment (10,000) (10,000) Proceeds from divestiture of businesses ,359 3, Cash acquired in acquisition, net , Cash paid for acquisitions, net (6,540) (67,645) (42,708) (3,500) (104,192) (16,319) (11,533) Net cash flows from investing activities (58,383) (94,358) (251,827) (145,437) 64,441 (65,719) (247,394) Proceeds from issuance of 2021 notes, net of issuance costs ,784 - Premiums paid for Capped Call Confirmations (36,616) - Partial repurchase of 2020 notes (370,235) - Proceeds from exercise of stock options ,423 31,211 98,071 Value of equity awards withheld for tax liability (8,150) (616) (365) Proceeds from exercise of class A common stock options 2,917 7,448 18,350 23, Proceeds from public offering, net of offering costs 70, , , Proceeds from concurrent private placement 5, Net cash flows from financing activties 79, , ,249 23,923 16,273 71,528 97,706 Net increase (decrease) in cash & cash equivalents during period 35, ,114 51,720 (75,995) 103,373 14, ,503 Cash & cash equivalents at beginning of period 12,278 47, , , , , ,592 Cash & cash equivalents at end of period 47, , , , , , ,095 Cash paid for interest ,325 9,198

14 Zillow Group Cash Flow Statement CV Fiscal Years Ending Dec E 2019E 2020E 2021E 2022E 2023E 2024E Operating Net income (loss) (45,661) (15,629) 50, , , , ,339 Depreciation & amortization 69,250 65,275 73,272 88,321 84,340 74,189 96,007 Accounts receivable, net (9,067) (14,417) (16,798) (29,517) (8,367) (5,345) (5,516) Prepaid expenses & other current assets (19,834) (10,092) (11,759) (20,662) (5,857) (3,742) (3,861) Accounts payable 2,370 1,353 1,577 2, Accrued expenses & other current liabilities 12,872 16,866 19,652 34,531 9,789 6,253 6,453 Accrued compensation & benefits 8,908 6,365 7,416 13,031 3,694 2,360 2,435 Deferred revenue 10,810 9,707 11,310 19,873 5,633 3,599 3,714 Deferred rent, current portion , Deferred rent, net of current portion 2,773 2,096 1, ,331 1,532 1,612 Deferred tax liabilities & other long-term liabilities (14,561) (15,000) (15,000) Total Cash From Operating Activities 17,934 47, , , , , ,916 Investing Property & equipment, gross (43,726) (109,862) (204,965) (477,401) (497,555) (436,351) (453,805) Intangible assets, gross (36,651) Short-term investments (12,313) (12,683) (13,063) (13,455) (13,859) (14,275) (14,703) Total Cash from Investing Activities (92,690) (122,545) (218,029) (490,857) (511,414) (450,626) (468,508) Financing Long-term debt 214,614 (62,194) 28,973 85,598 90,907 79,676 78,716 Proceeds from Common Stock 129, , , , ,034 92,906 - Total Cash from Financing Activities 343,647 66, , , , ,581 78,716 Change in Cash 268,891 (8,620) 62,769 (11,605) 46, , ,124 Beginning Cash 352, , , , , , ,453 Ending Cash 620, , , , , ,453 1,083,577

15 Zillow Group Common Size Income Statement CV Fiscal Years Ending Dec E 2019E 2020E 2021E 2022E 2023E 2024E Revenue % % % % % % % % % % Cost of revenue 9.56% 8.46% 7.91% 8.27% 8.30% 7.20% 5.67% 5.73% 5.02% 5.02% Sales & marketing 47.63% 44.99% 41.62% 40.88% 37.83% 34.74% 27.65% 26.51% 21.49% 21.49% Technology & development 30.80% 32.25% 29.72% 30.18% 27.68% 23.72% 18.43% 17.19% 12.90% 12.90% General & administrative 26.44% 37.05% 19.58% 18.49% 17.53% 15.25% 12.41% 12.54% 12.54% 12.54% Other (one-time) exenses 8.76% 0.02% 16.20% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total cost & expenses % % % % 99.15% 96.03% 92.83% 89.76% 79.45% 79.45% Depreciation expense 2.03% 1.61% 1.47% 1.65% 1.56% 1.86% 2.17% 2.87% 2.59% 3.23% Amortization Expense 9.66% 10.28% 8.76% 3.61% 2.48% 1.87% 1.26% 0.20% 0.00% 0.00% Income (loss) from operations % % % -0.62% 0.85% 3.97% 7.17% 10.24% 20.55% 20.55% Gain (loss) on debt extinguishment 0.00% -2.69% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other income 0.23% 0.32% 0.50% 0.34% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% Interest expense 0.85% 0.88% 2.56% 3.19% 2.16% 1.73% 1.52% 1.62% 1.73% 1.82% Income (loss) before income taxes % % % -3.47% -0.97% 2.59% 6.00% 8.97% 19.18% 19.09% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Income tax expense (benefit) -0.72% 0.02% -8.32% 0.00% 0.00% 0.00% 0.00% 0.00% 4.41% 4.39% Net income (loss) % % -8.77% -3.47% -0.97% 2.59% 6.00% 8.97% 14.77% 14.70% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Weighted average shares outstanding - bas 26.33% 21.28% 17.32% 14.51% 12.12% 10.20% 7.96% 7.63% 7.45% 7.16% Net income (loss) per share - basic 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

16 Zillow Group Common Size Balance Sheet CV Fiscal Years Ending Dec E 2019E 2020E 2021E 2022E 2023E 2024E Cash & cash equivalents 35.54% 28.77% 32.70% 47.16% 37.90% 34.37% 25.75% 25.83% 32.66% 36.41% Short-term investments 45.16% 31.05% 38.12% 32.11% 26.95% 22.83% 17.93% 17.30% 17.13% 16.96% Accounts receivable, net 4.62% 4.79% 5.05% 4.82% 4.82% 4.82% 4.82% 4.82% 4.82% 4.82% Prepaid expenses & other current assets 3.73% 4.11% 2.28% 3.37% 3.37% 3.37% 3.37% 3.37% 3.37% 3.37% Total current assets 89.05% 68.72% 78.15% 87.46% 73.04% 65.40% 51.87% 51.32% 57.98% 61.57% Restricted cash 0.47% 0.12% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Long-term investments 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Property & equipment, gross 15.52% 13.63% 13.96% 14.73% 18.81% 25.90% 38.27% 53.95% 67.11% 79.78% Less: Accumulated depreciation 1.62% 2.02% 3.53% 4.53% 5.25% 6.18% 6.88% 9.32% 11.55% 14.33% Property & equipment, net 13.90% 11.61% 10.43% 10.20% 13.55% 19.73% 31.39% 44.63% 55.56% 65.45% Goodwill % % % % % 98.31% 74.94% 70.21% 67.49% 64.89% Intangible assets, gross 96.08% 73.12% 39.74% 35.28% 28.75% 23.65% 18.03% 16.89% 16.24% 15.61% Less: accumulated amortization 10.03% 10.82% 10.05% 11.83% 12.12% 11.84% 10.29% 9.83% 9.45% 9.09% Intangible assets, net 86.05% 62.30% 29.69% 23.45% 16.63% 11.81% 7.74% 7.06% 6.78% 6.52% Other assets 0.78% 2.08% 2.41% 1.97% 1.60% 1.32% 1.01% 0.94% 0.91% 0.87% Total assets % % % % % % % % % % Accounts payable 0.52% 0.50% 0.33% 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% Accrued expenses & other current liabilities 6.68% 4.54% 5.70% 5.64% 5.64% 5.64% 5.64% 5.64% 5.64% 5.64% Accrued compensation & benefits 1.77% 2.84% 1.77% 2.13% 2.13% 2.13% 2.13% 2.13% 2.13% 2.13% Deferred revenue 3.33% 3.44% 2.96% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% Deferred rent, current portion 0.18% 0.16% 0.22% 0.19% 0.19% 0.19% 0.19% 0.19% 0.19% 0.19% Total current liabilities 12.47% 11.49% 10.99% 11.65% 11.65% 11.65% 11.65% 11.65% 11.65% 11.65% Deferred rent, net of current portion 2.13% 1.81% 1.98% 1.83% 1.62% 1.42% 1.10% 1.08% 1.09% 1.10% Long-term debt 35.68% 43.40% 35.79% 45.57% 33.29% 28.85% 25.32% 27.03% 28.76% 30.30% Deferred tax liabilities & other long-term liabilities 20.55% 16.08% 4.14% 2.28% 0.93% 0.00% 0.00% 0.00% 0.00% 0.00% Other non-current liabilities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total liabilities 70.83% 72.77% 52.91% 61.33% 47.49% 41.93% 38.07% 39.76% 41.50% 43.06% Additional paid-in capital % % % % % % % % % % Accumulated other comprehensive income (loss) -0.07% -0.03% -0.10% -0.08% -0.07% -0.06% -0.04% -0.04% -0.04% -0.04% Retained earnings (accumulated deficit) % % % % % % % -7.32% 7.73% 22.13% Total shareholders' equity % % % % % % % % % %

17 Zillow Group Value Driver Estimation CV Fiscal Years Ending Dec E 2019E 2020E 2021E 2022E 2023E 2024E Tax Rate Tax expense at federal statutory rate 35.0% 35.0% 35.0% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0% State income taxes, net of federal tax benefit 2.3% 1.9% 4.4% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Margial Tax Rate 37.3% 36.9% 39.4% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% NOPLAT Operating Revenues 644, ,589 1,076,794 1,316,710 1,615,829 1,964,356 2,576,762 2,750,364 2,861,267 2,975,718 COGS (61,614) (71,591) (85,203) (108,945) (134,175) (141,470) (146,141) (157,629) (143,505) (149,245) SG&A (477,534) (694,614) (659,017) (781,843) (894,497) (981,970) (1,032,120) (1,073,848) (973,782) (1,012,733) Depreciation (13,086) (13,590) (15,855) (21,662) (25,220) (36,464) (55,971) (78,898) (74,189) (96,007) Amortization (62,300) (87,000) (94,300) (47,588) (40,055) (36,808) (32,350) (5,442) - - R&D (198,565) (273,066) (319,985) (397,330) (447,249) (466,020) (474,958) (472,887) (369,012) (383,773) Implied Interest on Op Leases 8,351 7,871 7,650 20,595 17,612 14,796 12,732 12,385 12,385 12,385 EBITA (160,071) (285,401) (89,916) (20,063) 92, , , ,043 1,313,164 1,346,345 Provision for Income Taxes (4,645) 130 (89,586) , ,634 Tax on Other Income (Expense), Net (1,488) (1,733) (8,720) (8,626) (6,736) (6,236) (6,923) (8,037) (9,047) (10,041) Tax Shield on Op Lease Interest 3,115 2,904 3,014 4,737 4,051 3,403 2,928 2,848 2,848 2,848 Total Adjusted Taxes (3,018) 1,301 (95,292) (3,889) (2,685) (2,833) (3,994) (5,189) 120, ,441 Change in Deferred Taxes 132,482 3,664 (91,585) (14,561) (15,000) (15,000) NOPLAT (30,606) (280,435) (276,793) (38,513) 74, , , ,855 1,433,182 1,469,786 Growth 816.3% -1.3% -86.1% % 300.5% 182.7% 14.8% 47.9% 2.6% Invested Capital Cash & cash equivalents 229, , , , , , , , ,453 1,083,577 % of Cash 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Normal Cash 6,874 7,308 10,563 18,630 18,371 20,254 19,906 21,312 28,034 32,507 Accounts receivable, net 29,789 40,527 54,396 63,463 77,880 94, , , , ,425 Prepaid expenses & other current assets 24,016 34,817 24,590 44,424 54,516 66,274 86,936 92,793 96, ,396 Accounts payable (1,681) (3,158) (4,724) (9,358) (3,361) (4,257) (3,587) (5,957) (7,311) (8,887) Accrued expenses & other current liabilities (4,893) (6,318) (11,377) (16,883) (43,047) (38,427) (61,373) (74,245) (91,111) (110,763) Accrued compensation & benefits (1,587) (2,514) (4,440) (6,735) (11,392) (24,057) (19,109) (28,017) (34,381) (41,797) Deferred revenue (5,769) (8,349) (12,298) (15,356) (21,450) (29,154) (31,918) (42,728) (52,434) (63,744) Deferred rent, current portion (60) (94) (546) (864) (1,172) (1,347) (2,400) (2,474) (3,037) (3,692) Operating Working Capital 46,689 62,219 56,164 77,321 70,345 83, ,651 93,247 74,203 47,445 Other Operating Assets Property & equipment, net 89,639 98, , , , , ,909 1,227,566 1,589,728 1,947,526 Intangible assets, net 554, , , , , , , , , ,119 Present Value of Op Leases 143, , , , , , , , , ,531 Other non-current assets 5,020 17,586 25,934 25,934 25,934 25,934 25,934 25,934 25,934 25,934 Total 793, , , , , ,425 1,253,921 1,661,149 2,023,311 2,381,109 Other Operating Liabilities Deferred rent, net of current portion 13,743 15,298 21,330 24,103 26,199 27,883 28,310 29,642 31,174 32,786 Deferred tax liabilities & other long-term liabilities 230, , , , , , , , , ,704 Other non-current liabilities 132, ,146 44,561 30,000 15, Total 376, , , , , , , , , ,490 Invested Capital 463, , , , , , , ,442 1,243,352 1,494,064 Return on Invested Capital (ROIC) % % % % 30.15% 96.76% % % % % Free Cash Flow (FCF) (300,477) (138,983) (149,038) (91,168) 13, , , ,269 1,171,272 1,219,075 Economic Profit (EP) (47,200) (320,112) (304,371) (55,163) 53, , , ,191 1,349,236 1,363,438

18 Zillow Group Weighted Average Cost of Capital (WACC) Estimation Beta 1.21 Risk-Free Rate 3.40% Equity Risk Premium 4.80% Cost of Equity 9.22% Default Spread 2.40% Pre-Tax Cost of Debt 5.80% Tax Rate (Marginal) 23.00% After-Tax Cost of Debt 4.47% Market Value of Equity 5,890, Bond 460, Bond 373, Premium % 2023 Discount 90.50% MV of Bonds 825,306 MV of Operating Leases 131,893 Market Value of Debt 957,198 MV Weight of Equity 86% MV Weight of Debt 14% MV Weight of Pfd 0% Forward WACC 8.55%

19 Zillow Group Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models Key Inputs: CV Growth 2.55% CV ROIC 118% WACC 9% Cost of Equity 9.22% CV Fiscal Years Ending Dec E 2019E 2020E 2021E 2022E 2023E 2024E 2025E DCF Model Number of Periods NOPLAT (38,513) 74, , , ,855 1,433,182 1,469, ,902 Change in Invested Capital 52,655 61,273 81, , , , , ,047 FCF (91,168) 13, , , ,269 1,171,272 1,219, ,854 CV 7,271,957 Total FCF (91,168) 13, , , ,269 1,171,272 8,491,032 PV of FCF (83,984) 11, , , , ,811 4,780,328 Value of Operating Assets 6,434,606 Non Operating Assets & Liabilites, Debt, Other Excess Cash 602,356 Short-term investments 422,757 ESOP (274,492) Long-term Debt (600,030) Operating Leases (355,090) Value of Equity 6,230,108 Shares Outstanding 191,111 Price per share Partial Year Adj EP Model Number of Periods Economic Profit (55,163) 53, , , ,191 1,349,236 1,363, ,109 CV 5,777,894 Total EP (55,163) 53, , , ,191 1,349,236 7,141,332 PV of EP (50,817) 45, , , , ,572 4,020,467 Total PV of EP 6,239,941 Initial Invested Capital 194,666 Value of Operations 6,434,606 Non Operating Assets & Liabilites, Debt, Other Excess Cash 602,356 Short-term investments 422,757 ESOP (274,492) Long-term Debt (600,030) Operating Leases (355,090) Value of Equity 6,230,108 Shares Outstanding 191,111 Price per share Partial Year Adj

20 Zillow Group Dividend Discount Model (DDM) or Fundamental P/E Valuation Model Fiscal Years Ending Dec E 2019E 2020E 2021E 2022E 2023E 2024E EPS $ (0.24) $ (0.08) $ 0.25 $ 0.75 $ 1.18 $ 1.98 $ 2.05 Key Assumptions CV growth 2.55% CV ROE 9.41% Cost of Equity 9.22% Future Cash Flows P/E Multiple (CV Year) EPS (CV Year) $ 2.05 Future Stock Price $ Dividends Per Share $ - Future Cash Flows $ Discounted Cash Flows $ Intrinsic Value $ Time Adjusted Price Per Share $ 13.07

21 Zillow Group Relative Valuation Models Revenue Ticker Company EV 2018E EV/Revenue 18 CSGP CoStar Group $ RDFN Redfin $ EXPE Expedia $ TREE LendingTree $ ELLI Ellie Mae $ Average 5.2 ZG Zillow 6.84 $1.32 Implied Value: $ 35.90

22 Zillow Group Key Management Ratios CV Fiscal Years Ending Dec E 2019E 2020E 2021E 2022E 2023E 2024E Liquidity Ratios Current Ratio (Current Assets/Current Liabilities) % % % % % % % % % % Operating Cash Flow Ratio (Operating CF/Current Liabilities) % % 10.63% 18.64% 74.31% % % % % % Quick Ratio (Cash & Other Liquid Assets/Current Liabilities) % % % % % % % % % % Activity or Asset-Management Ratios Asset Turnover (Sales/ Total Assets) 20.56% 26.88% 33.33% 37.07% 44.58% 50.88% 59.90% 57.42% 52.99% 50.17% Receivables Turnover (Sales/ Average Accounts Receivable) 2660% 2408% 2269% 2234% 2286% 2277% 2355% 2142% 2116% 2115% Financial Leverage Ratios Debt-to-Equity (Total Debt/ Total Equity) 8.59% 14.50% 14.48% 21.87% 18.82% 18.66% 19.64% 20.11% 19.54% 19.39% Equity Ratio (Total Equity/ Total Assets) 85.44% 80.44% 82.37% 77.26% 78.83% 78.67% 77.20% 77.17% 78.01% 78.40% Profitability Ratios Return on Assets (Net Income/ Total Assets) -4.75% -7.00% -2.92% -1.29% -0.43% 1.32% 3.60% 5.15% 7.83% 7.37% Return on Equity (Net Income/ Total Equity) -5.56% -8.70% -3.55% -1.66% -0.55% 1.67% 4.66% 6.67% 10.03% 9.41% Gross Margin (Revenue-COGS/ Revenue) % % % % % % % % % % EBITDA Margin (EBITDA/Sales) % % -8.35% -1.52% 5.71% 16.11% 32.91% 35.42% 45.89% 45.24% Profit Margin (Net Income/ Sales) % % -8.77% -3.47% -0.97% 2.59% 6.00% 8.97% 14.77% 14.70% Payout Policy Ratios Total Payout Ratio (Dividends + Repurchases) / Net Income N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Dividend Payout Ratio (Dividends/ Net Income) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A