Zillow is a strong long-term investment opportunity driven by its platform network effects, high-growth rental/mortgage businesses, margin improvement, cheap valuation, and aggressive share repurchases.

Remember, I'm looking for stocks that will give me 10x returns over the next 10 years. I don't really care what the price of a stock is in the next month or two. I want to know how the company will grow in the next decade ?

Will there be opportunities for revenue growth, margin expansion, and multiple expansion? There may even be an opportunity for a share buyback. In a company, I mainly look at these four things.

And this company has all these characteristics in abundance. The company's revenue growth rate is 17.7% and it is increasing steadily. Its valuation is extraordinary. So this is an excellent opportunity for multiple expansion.

Its forward price-to- earnings multiple is only 11 and price-to-free cash flow is only 15. These margins are likely to increase as they reduce their operating costs.

The stock I'm talking about is Zillow. Yes, one of the most overlooked companies in the market, because it is associated with the housing market. In fact, its share price has fallen 61% in the past year.

But in my opinion, it's a great value for a long-term investment and a great price to buy. I will discuss Zillow in detail very soon.

Okay, let's talk about Zillow and what I like about this company. This is a typical aggregator business. The value for Zillow is that they control customer demand. This means that if you want to sell a home, or if you're an agent and want to reach those customers, you have to go to Zillow.

This is how business is run these days. Millions of people come to their site just to view homes, and that's where their value lies. And this is a simple aggregator.

What has changed in the last few years is that before they were only for the home. Now they're saying, "You know what? Most people actually start their search with a mortgage .

What kind of house can I afford? Not just what kind of house do I want to buy? What are the monthly payments? What do I qualify for?" So, this is another foundation of business.

However, the bigger and more important issue is rent or rentals. And if you have n't rented a home , this may come as a surprise to you , but it's a huge growth business and it's now a place where people are looking for answers to all their housing questions.

This is where the value of aggregation lies. If agents do more for our lives, that's also worth it. Where will those agents look for information? Will there be millions of different websites in millions of different cities around the world?

I think it will be a network like Zillow. This is the reason why its sustainability is much greater than what many in the market currently think.

Let's look at some numbers. The green part here is residential business. This is their traditional business. It takes a small portion from each residential transaction. Agents are essentially paying this cost.

So, they have platform fees for some of their tools, and based on the agreement with Zillow, Zillow takes a small cut of the sales that are completed through Zillow. So, it's not a huge growth business. 8% compound annual growth rate.

That's okay. They are actually increasing their share in the residential housing market.

But let's hide it for now , because I mentioned the 17.7% growth rate. The growth is actually coming from the mortgage and rental business. So, these are the two parts. The rental business is now at $734, growing at a compound annual growth rate of 34%.

This is really amazing. And these numbers demonstrate the power of Zillow's platform.

Look at this change in their income. In the March quarter of 2024, their growth was just 6% year- on-year. The housing market is accelerating, even though it's not doing very well.

Now, the stock market is thinking, hey, you know what? Mortgage rates are rising. This is going to be bad for Zillow. In the short term, this is probably true. But over time , people have to sell their homes.

I don't think the market will get significantly worse in terms of volume. That's ultimately what matters for Zillow. So, it will continue to grow, especially since their rental business is constantly growing.

But there's another thing to remember about Zillow. Let's look at two things. Their operating profit and operating margin, I'm bringing this number here right now. It has been continuously improved.

I talked about revenue growth, what we want is margin growth and the potential for multiple expansion. Okay ? So, we are looking at the income issue. This is margin expansion. Operating margin was -13.5% in the March 2024 quarter.

Now, it has become slightly positive. Okay? We want it to continue moving in the right direction. They have announced that they are laying off 500 employees, meaning they are reducing their workforce.

One thing to note about Zillow is that their operating profit is very different from their free cash flow. So, here in orange we see their operating profit. You can see that operating profit is very slightly positive.

However, free cash flow is actually significantly positive. So, $ 258 million in the last year. It has fluctuated a bit , but has remained roughly on the same trend over the past few years.

So, what is the reason for this ? And the real reason is stock- based compensation. Now, I want you to notice that stock- based compensation is much higher. This is one of my biggest criticisms of Zillow, but it is diminishing now.

So, in the last year, you've seen it go down from $423 million to $363 million. It needs to be reduced further. They are spending too much on stock-based compensation. However, the company has started working on issues such as reducing the number of employees and perhaps paying them differently.

So, you can see that our revenue is growing , our margins are also growing. Now, let's talk about those multiples. So, the multiples have decreased significantly. Now, only 2.2 times sales.

If you want to look at the price to free cash flow, it is now only 24 times. I mentioned that on a forward basis, it's about 15 times. And another way to look at it is enterprise value to operating cash flow.

Now, only around 16 times. So, the multiple is decreasing. This means that in the future, if this is a good valuation and the operations continue well, there is a lot of opportunity for the multiple to increase because today we are at a fairly low multiple.

However, another big issue is that as multiples come down and operations improve , management is using a lot of their cash to buy back shares. So, you can see that in the last few quarters alone, we're seeing about $800 million in buybacks.

The number of outstanding shares has decreased from approximately 242 million to 25 million. They still have the opportunity to increase that buyback. They have net cash on their balance sheet.

So, this is another way to increase the multiple. You increase the price-to- earnings multiple. When the market sees that you are returning cash to shareholders in the right way , you get a slightly better valuation from the market.

So, if you look at all of this and add it up , and the fact that this is a multi- trillion dollar market. Zillow has the opportunity to become an aggregator or network effect business in the multi- trillion dollar US housing market.

It's a great place to live and the numbers show us that revenue growth is accelerating as they expand into the mortgage, residential, and rental businesses. If the residential business starts to turn around, it will have a major positive impact for them.

Our margins are expanding. There are many opportunities to expand your multiple based on the current multiples. Meanwhile, management will be able to buy back a significant amount of shares with the free cash flow from the business.

So, I really like Zillow's current position. I think their business is very important not only for home buyers, but also for agents. If you're looking for a home, there's no better technology than Zillow to build all the resources you need to create floor plans or provide accurate information to customers.

This is the real price in the market. That's why I think it's an undervalued stock. The stock price has fallen by more than 60% in the past year. In my opinion, this is going to be the foundation for success in the long run.

In the next 5 to 10 years, I am sure it will outperform the market.