Zillow Group NASDAQ: Z, ZG Recommendation: Buy

Dane Williams

1 Buying and selling a home sucks…

2 …but it doesn’t have to

3 Investment Thesis Recommendation: I am recommending a BUY for Zillow Group (Z, ZG), because they have a massive competitive advantage in the emerging online direct home buying industry, which sets them up for substantial long term growth. Rationale: Zillow’s strong core business of providing online information about homes and acquisition of Mortgage Lender’s of America puts them in a position to simplify and control the entire home buying process with their new Zillow Offers business. Ultimately, Zillow is at the forefront of an emerging market which opens up an entirely new source of revenue. 2. Launch of Zillow Offers model for buying 3. Acquisition of 1. Strong core and selling Price Target: $48.02 internet business Mortgage with lots of data Lenders of America 37% upside to 4. current price of Revolutionize $35.11 (ZG) the home buying experience

4 Company Overview

Company Profile Historical Stock Chart Since IPO

• Zillow Group, Inc. was founded in 2006 in Seattle by 70 30000000 Richard Barton and Lloyd Frink, who are former 60 25000000 Microsoft executives and co-founders of travel 50 website Expedia 20000000 40 • Specializes in the end to end lifecycle of owning and 15000000 living in a home: buying, selling, renting, financing, 30 10000000 remodeling, etc. 20 • Zillow.com, along with Zillow’s other subsidiary’s are 10 5000000 the leading online real estate platform 0 0 • In August 2016, Zillow Group split into Z and ZG, with C shares trading under the old Z ticker and A 7/20/11 7/20/12 7/20/13 7/20/14 7/20/15 7/20/16 7/20/17 7/20/18 shares trading under the new ZG ticker Volume Adj Close

Revenue Breakdown (3 Months Ended Dec. 31 2018) Total Revenue By Year (millions)

$1,400 20.0% 11% $1,200 15.0% $1,000 10.0% 12% Premier Agent $800 5.0% Rentals $600 0.0% Mortgages 6% $400 -5.0% Other (1) 61% $200 -10.0% Homes segment 10% $- -15.0% 2012 2013 2014 2015 2016 2017 2018

Revenue Ebitda Margin

Sources: Zillow 10K 5 Industry Overview

Internet Real Estate Overview “iBuying” Overview • Tech companies “flip homes” – no realtor necessary • Websites geared towards online real estate marketing – provide information about homes and rentals to • Tech company gives an instant all cash offer to prospective prospective buyers sellers, usually for 75-100% AVM value of the home • Partner with realtors in order to assist them with tools that • Ex. 1 million dollar home, iBuyer offers 85% value help in marketing homes for sale, finding renters, finding of home and a 7% repairs fee as opposed to 6% in buyers, etc. agent commissions • Advantage to seller is no worrying about repair costs, seller • “Kelly blue book of homes” concessions, or potential mortgage and rental overlaps • AVM – Automated Valuation Model, “Zestimate” • Given an offer as fast as INSTANTLY, no open houses • iBuyer then sells home at a fixed algorithmic price Value of the US Real Estate Sector (Trillions) Real Estate Website Market Share Buy Users

3 Zillow* 11% Trulia* 2.5 4% 29% HotPads* 2 5% Yahoo! Homes** 1.5 Realtor 15% 1 RedFin

0.5 Homes 19% Other 0 16% 1% 2011 2017 1999 2015 1998 2012 2013 2014 2016 2001 2010 2007 2005 2002 2003 2004 2006 2009 2000 2008 *Zillow Group Subsidiary, **Powered By Zillow

4 Sources: Bloomberg, Redfin, Statista, Zillow 10K 6 Zillow Group Brands

Consumer Brands:

Business Brands:

7 Business Model

Old Revenue (IMT) New Revenue (Homes)

Mortgages Mortgages Homes Premier Agents Rentals • Q1 of 2019 will • 11% revenue • 61% of revenue • 10% of revenue • 6% of revenue divide revenue for Q4 2018 • Zillow Offers, • Advertising • Primarily into 3 segments formerly • Suite of services sold to advertising sold – IMT, Instant Offers marketing and property to mortgage Mortgages and business managers or lenders and other • Buying and technology tools other rental mortgage Homes selling homes – for real estate professionals professionals • Includes all “flipping” agents and • Offered on a cost • Sold on cost per revenues from homes brokers per lead, cost per lead basis MLOA • Began buying • Offered on a cost click, cost per • Revenue acquisition on homes in April per impression impression, or generated by October 31st of 2018 basis cost per lease 2018 Mortech – • Began selling • 1 impression = 1 generated basis subscription • MLOA - sold • Also includes based mortgage homes in July mortgage of 2018 advertisement revenue from software pricing originations as appearing on a StreetEasy brand engine + leads well as sale of page viewed by a on a cost per user on mobile or listing basis mortgages on website secondary market • New construction – advertising to home builders; cost per Other residential community basis 12% • Display – graphical mobile and web advertising sold to advertisers promoting their brands on mobile app + website

Sources: Zillow 10k 8 1. Strong Core Internet Business + Data

Dominates Internet Real Estate Market Share Leverage Data Advantage

• Zillow brands control 65% of internet real • “Zestimates” on over 100 million homes in estate traffic the US can be used for effective iBuying • In 2019 U.S. real estate agents and brokers • Ability to use data to personalize the home will spend 8.3 billion in residential buying and selling experience advertising, and real estate developers will • Provides unmatched data on homes to spend 715 million customers, helping people make informed • Greatest amount of web traffic = greatest decisions amount of data on customers and their • Zillow’s data is relevant to buyers, sellers, preferences renters, homeowners, agents, and other • Room to grow into international markets professionals • Data as a foundation for new products Unique Users and Visits by Quarter (millions) Mobile Advertising Spending In The U.S. (Billions)

200 2500 180 $131.4 160 2000 $118.9 140 $105.3 120 1500 $90.3 100 $75.0 80 1000 $60.7 60 $46.7 40 500 $31.7 20 0 0 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q22018 Q32018 Q4

Unique Users Visits 2015 2016 2017 2018 2019 2020 2021 2022

Sources: Statista, Zillow Group 10k, National Association of REALTORS 9 2. Zillow Offers

Emerging Market Logical Next Step For Monetizing Data • iBuying is a new practice in the real estate • Increasing consumer choice – convenience industry • Analogous to Netflix entering original • In 2018 the aggregate transaction value of content homes in the U.S. was $1.8 trillion • Capital intensive, but demonstrates • Real estate commission revenue was $87 significant potential for Zillow to billion provide better service to customers and • Creating an entirely new category of real estate generate more revenue -> disrupt industry • Increase total addressable market • Zillow has access to capital and data which will allow them to scale better than competition Competitors Cannot Compete With Zillow’s Massive Real Estate Database

Redfin Opendoor Knock

• Significantly less data • Private • Private, even smaller • Only 5% of real estate • Only an iBuying and younger than traffic company à lacks Opendoor • Late to iBuying core internet + data • Weak name market, fewer • $325M in series E recognition locations funding June 2018 • $400M in series B • $1.7B valuation funding January 2019

Sources: Crunchbase, Statista 10 2. Zillow Offers

Zillow HQ, Seattle Redfin HQ, Seattle

Knock HQ, New York City

Opendoor HQ, San Francisco

11 3. Mortgage Lenders of America

End to End Real Estate Platform Edge Over Other Real Estate Tech Companies • Involvement in all aspects of home ownership while • Redfin, Opendoor, and Knock do not own a streamlining the process mortgage lender • Positioning Zillow as the go to company for all • Prevents competitors from offering as things related to real estate seamless of an experience as Zillow • Expands on Zillow’s role in mortgages • Adds another part of the home buying transaction • Previously offered technology to mortgages process which Zillow can simplify lenders with Mortech • Zillow is focused on not just the selling piece to • When an agent brings a buyer to a Zillow owned iBuying, but the purchasing aspect as well home, the transaction can close more quickly and • MLOA purchased for integration w/ Offers program with greater certainty • Like payments integrated in Uber Purchase Volume of Mortgages in the United States from 2015 to 2017, by type (in millions)

3.7 3.5 3.4 3.2 2.8

2.2

0.2 0.2 0.2

2015 2016 2017

Home Purchase Refinancing Improvements

Sources: Statista, 2018 Q4 Earnings Call 12 4. Revolutionize Home Buying Experience

Dominate Proprietary Invent and Market Share Data Simplify

Home Sale Process Zillow Offers Sale Traditional Sale Preparations: Just request offer online Repairs, cleaning, staging, etc. Showings: Zillow home evaluation Open houses, schedule around showings Time: Choose your closing date List for weeks or months + 30 days to close Offer: Cash and done Risk of sale falling through Cost: Potential service fee for repairs Buyer and seller agent commission, rent or double mortgage, seller concessions

Amazon: Invent and Simplify - Leaders expect and require innovation and invention from their teams and always find ways to simplify […] As we do new things, we accept that we may be misunderstood for long periods of time

13 Key Risks

Key Risks Mitigants

û Mortgage lending can have many associated ü Adding a mortgage lender to the Zillow Group risks; little data on MLOA past performance as it portfolio is a necessary step in providing is a new acquisition seamless home related services

û Potential real estate market slow down ü The ibuying model is designed to work in any real estate market – does not require homes to be increasing in value in order to turn a profit

û Increase in millennial home buying: 34% to 36% ü While premier agents rentals may take a hit, PA of home buyers from 2017 to 2018 –> negative homes will benefit, and Zillow Offers is targeting impact on premier agents rentals millennials who are most willing to adopt “uberized” home buying

ü ibuying is a new concept to all of Zillow’s û Transition to instant offers – lack of experience competitors as well and Zillow has IMT business buying and selling homes to fall back on in case of issues with Zillow Offers

Sources: National Association of Realtors 14 Final Recommendation

Base Case

Price Target: $48.02 Upside: 27%

Recommendation: I am recommending a BUY for Zillow Group (Z, ZG), because they have a massive competitive advantage in the emerging online direct home buying industry, which sets them up for substantial long term growth.

15 Appendix

16 Valuation – Comparable Companies Analysis Valuation Statistics Market Enterprise EV / Revenue EV / EBITDA Price / Diluted EPS Company Ticker Capitalization Value 2018A LTM 2018A LTM 2018A LTM Redfin Corporation RDFN $1,724 $1,409 2.6x 2.8x NM NM NM NM eXp World Holdings, Inc. EXPI $661 $643 2.5x 1.5x NM NM NM NM RE/MAX, LLC RMAX $677 $443 1.6x 2.1x 3.2x 4.6x 42.7x 84.6x TripAdvisor, Inc. TRIP $7,067 $6,480 4.3x 4.0x 39.1x 27.6x NM NM Netflix, Inc. NFLX $156,796 $163,361 10.4x 10.4x 134.0x 97.4x 214.1x 254.8x Zillow Group, Inc. ZG $7,647 $6,940 5.1x 5.2x 66.3x 275.8x NM NM

25th Percentile $669 $543 2.1x 1.8x 3.2x 4.6x - - Mean 33,385 34,467 4.3x 4.2x 58.8x 43.2x 128.4x 169.7x Median 1,724 1,409 2.6x 2.8x 39.1x 27.6x 128.4x 169.7x 75th Percentile 81,931 84,921 7.4x 7.2x 134.0x 97.4x - -

Operating Statistics Revenue Revenue Growth EBITDA EBITDA Margin Company Ticker 2018A LTM '17-'18A LTM 2018A LTM 2018A LTM Redfin Corporation RDFN $487 $487 32% 82% ($35) ($35) -7% -7% eXp World Holdings, Inc. EXPI $500 $500 - 834% ($21) ($21) -4% -4% RE/MAX, LLC RMAX $213 $213 10% 21% $97 $97 46% 46% TripAdvisor, Inc. TRIP $1,615 $1,615 4% 9% $237 $237 15% 15% Netflix, Inc. NFLX $15,794 $15,794 35% 79% $1,688 $1,688 11% 11% Zillow Group, Inc. ZG $1,334 $1,334 24% 58% $25 $25 2% 2%

25th Percentile $350 $350 5.3% 15.1% ($28) ($28) (5.8%) (5.8%) Mean 3,722 3,722 20.1% 205.0% 393 393 11.9% 11.9% Median 500 500 20.7% 78.9% 97 97 10.7% 10.7% 75th Percentile 8,705 8,705 34.2% 458.1% $963 $963 30.2% 30.2%

17 Valuation – WACC

Debt Outstanding Amount Interest rate % of Total Weighted 2.0% Convertible Senior Notes Due 2021 $395 2.000% 46.5% 0.9% Convertible Senior Notes Due 2023 295 1.500% 34.7% 0.5% Convertible Senior Notes Due in 2020 10 2.750% 1.1% 0.0% Revolving Credit Agreement With Credit Suisse AG 117 5.860% 13.8% 0.8% Warehouse Lines of Credit - Facility 33 4.730% 3.9% 0.2% Total Debt $849 2.5%

Capital Structure Current Share Price $35.11 Debt-to-Total Capitalization 10.57% Current Shares Outstanding 204.6 Equity-to-Total Capitalization 89.43% Equity Value $7,183.51 Total Debt $849 Total Equity $7,183.51 Cost of Debt Cost of Debt 2.47% Tax Rate 20.60% After-tax Cost of Debt 1.96%

Cost of Equity Risk-free Rate(1) 2.52% Market Risk Premium(2) 5.00% Levered Beta 1.28

Cost of Equity 8.92%

WACC 8.19%

18 Valuation – DCF (Base)

FYE December 31, FYE December 31, ($ in millions) 2015A 2016A 2017A 2018A 2019E 2020E 2021E 2022E 2023E 2024E 2025E Total Revenue $644.7 $846.6 $1,076.8 $1,333.5 $1,876.5 $2,376.1 $2,845.5 $3,237.5 $3,605.0 $3,893.2 $4,123.8 Revenue Growth -- 31.3% 27.2% 23.8% 40.7% 26.6% 19.8% 13.8% 11.4% 8.0% 5.9%

Expenses COGS 60.1 69.3 85.2 153.6 372.6 581.0 766.9 896.8 1,011.7 1,104.5 1,186.5 Gross Profit $584.6 $777.3 $991.6 $1,179.9 $1,503.9 $1,795.1 $2,078.5 $2,340.7 $2,593.3 $2,788.7 $2,937.3 Gross Margin 90.7% 91.8% 92.1% 88.5% 80.1% 75.5% 73.0% 72.3% 71.9% 71.6% 71.2% SG&A (excl. SBC) 387.9 607.5 545.4 665.7 1,032.1 1,188.0 1,365.8 1,521.6 1,658.3 1,751.9 1,814.5 R&D 184.5 255.6 320.0 410.8 523.2 578.2 625.8 679.0 722.8 773.4 785.0 Operating Expenses 572.4 863.1 865.4 1,076.5 1,555.3 1,766.2 1,991.6 2,200.6 2,381.1 2,525.3 2,599.4 Operating Income (EBIT) $12.2 ($85.8) $126.2 $103.4 ($51.4) $28.9 $86.9 $140.1 $212.2 $263.4 $337.8 EBIT Margin 1.9% (10.1%) 11.7% 7.8% (2.7%) 1.2% 3.1% 4.3% 5.9% 6.8% 8.2% Income Tax Expense (24%) (4.6) 0.1 (89.6) (31.1) (12.3) 6.9 20.9 33.6 50.9 63.2 81.1 EBIAT $16.8 ($85.9) $215.8 $134.5 ($39.1) $22.0 $66.1 $106.5 $161.3 $200.2 $256.8

Cash Flow Plus: D&A 75.4 100.6 110.2 99.4 139.9 173.5 199.2 216.9 234.3 245.3 251.6 Discretionary Cash Flow $92.2 $14.7 $325.9 $233.9 $100.8 $195.4 $265.3 $323.4 $395.6 $445.4 $508.3 Less: Increase in NWC 0.0 (4.7) 17.4 (239.4) (113.2) (93.5) (103.3) (83.0) (74.5) (57.8) (38.4) Less: CapEx (52.7) (62.1) (66.7) (66.1) (93.0) (117.8) (141.0) (160.5) (178.7) (193.0) (204.4) Free Cash Flow $39.5 ($52.1) $276.6 ($71.6) ($105.5) ($15.9) $20.9 $80.0 $142.4 $194.6 $265.5 Free Cash Flow Growth -- (232.1%) (630.5%) (125.9%) 47.3% (85.0%) (231.9%) 282.1% 78.2% 36.6% 36.4%

Unlevered Free Cash Flow WACC 8.19% Discount Period 0.5 1.5 2.5 3.5 4.5 5.5 6.5 Discount Factor 0.96 0.89 0.82 0.76 0.70 0.65 0.60 Present Value of Free Cash Flow ($101.4) ($14.1) $17.2 $60.7 $100.0 $126.2 $159.2

19 Valuation – DCF (Base)

Enterprise Value DCF Implied Equity Value and Share Price Cumulative Present Value of FCF $347.8 Enterprise Value $10,646.9 Terminal Value Less: Total Debt $848.6 Terminal Year Sales $4,123.8 Plus: Cash & Cash Equivalents $1,554.9 Exit Multiple 4.2x Terminal Value $17,178.2 Implied Equity Value $11,353.2 Discount Factor 59.95% Present Value of Terminal Value $10,299.1 Implied Share Price $55.49 % of Enterprise Value 96.7% Shares Outstanding 205 Enterprise Value $10,646.9 Comps Implied Equity Value and Share Price Enterprise Value $5,555.1 DCF Sensitivity Analysis Less: Total Debt $848.6 WACC Plus: Cash & Cash Equivalents $1,554.9 55.49 6.2% 7.2% 8.2% 9.2% 10.2% 2.2x $34.92 $33.06 $31.32 $29.70 $28.18 3.2x Implied Equity Value $6,261.4 $48.57 $45.90 $43.41 $41.08 $38.91 EV/Sales 4.2x $62.21 $58.73 $55.49 $52.46 $49.64 Implied Share Price $30.60 5.2x $75.85 $71.57 $67.57 $63.85 $60.37 6.2x $89.49 $84.40 $79.66 $75.23 $71.09 Shares Outstanding 205

Method Weight Price Comparable Companies 30% $30.6 DCF 70% $55.5

Fair Value Estimate $48.02

20