By Bill Alpert
Through the housing slowdown, Zillow Group and Rocket Companies have grown.
That's mostly thanks to their dominance of internet search traffic. Sitting at the mouth of residential real estate's customer acquisition funnel, the two companies are well positioned to make homebuying into a cheaper and more efficient process, says Brad Safalow, whose independent investment research firm PAA Research has followed the real estate services industry for years. He has Buys on both stocks.
Buying a home remains an archaic process, notes Safalow. "It can take 45 to 60 days," he says, because it involves real estate agents, lawyers, bankers, mortgage brokers, and title insurers.
Zillow and Rocket want to take out costs and tighten house buying into a seamless transaction. Doing so will lead to significant market share gains for both.
Zillow is bonding closely with real estate agents who used its enhanced software to call on customers, schedule house showings, and offer mortgage referrals. In return, Zillow gets a commission on sales.
This Enhanced Market platform is available in over 90 U.S. markets. By year end, Zillow expects it will handle a third of its connections with home buyers. Safalow wouldn't be surprised if Zillow eventually brings agents in-house and becomes a real estate broker. Zillow couldn't be reached for comment.
Safalow bets that Zillow's share price can rise from its recent $67 to $108, or 20 times the cash operating earnings he forecasts for 2027.
"Rocket has the potential to be the single most disruptive company in the history of residential real estate," says Safalow. By acquiring the digital-savvy real estate firm Redfin, and the mortgage servicing firm Mr. Cooper, Rocket will have enormous cross-selling opportunities and lower customer acquisition costs, Safalow predicts.
Redfin already charged less to list homes. Now, Rocket can bundle mortgage financing, refinancing, and perhaps things like title insurance. It can take cost and hassle out of each of those components, while compensating the employees of each unit for cross-sales. No other company in the industry is positioned to do that, says Safalow.
He believes Rocket stock can rise from a recent $1 to $25, or 20 times his forecast for 2027 cash operating earnings.
The analyst is less sanguine about the real estate data provider CoStar Group. It has grown for decades as CEO Andy Florance has bolted on businesses and dominated their niches. But the homebuying portal Homes.com may turn out to be Florance's first failure, Safalow opines.
CoStar bought Homes.com in 2014 for $585 million and has spent about $1 billion marketing it, including a brand relaunch at the 2024 Super Bowl. Yet revenue from the business was just $25 million in the first quarter. Activist investors are urging Florance to unload Homes.com. Safalow thinks they are right.
A business that has done well for CoStar is the apartment-rental portal Apartments.com. That business will now face real competition as Zillow applies its brand, balance sheet and low customer acquisition costs to Zillow Rentals, says Safalow.
Other important CoStar businesses are tied to commercial real estate, which may not see an upturn for a few more years, so Safalow has a Sell on CoStar stock. He thinks it could drop from a recent $80 to $52, which would still leave it trading at 25 times his estimate for 2027 cash operating profit.
CoStar disagrees. Spokesman Matt Blocher says the company's nonresidential businesses average 43% margins and that CoStar has a history of successfully investing its cash flow in new products, services, and geographies. The company is spending the annual equivalent of $2 a share on Homes.com, and believes its success will double CoStar's share price.
"We are seeing the flywheel catch as our recently built sales force of over 500 sales reps generate bookings that will result in large percentage increases in revenue in 2026 and beyond," says Blocher. "We expect the gap between expenses and revenue to narrow, and in the not-too-distant future we believe we will be generating positive [cash earnings] and top-line growth."
Write to Bill Alpert at william.alpert@barrons.com
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June 26, 2025 02:30 ET (06:30 GMT)
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