Hedge fund Caledonia Private Investments expects Zillow’s valuation to soar to $50 billion, which would mean the 9-year-old firm has just begun to scratch the surface of its potential worth.

Caledonia is Zillow’s biggest investor, so they would think that, right? So just how does Caledonia think the real estate listing portal that’s becoming a household name could reach those lofty heights?

By bridging the gap between its dominant consumer market share, and the relatively small amount Zillow pulls in relative to what real estate brokers and agents currently spend on advertising and follow the model of dominant real estate portals in other countries, said Michael Messara, a Caledonia senior portfolio manager, at an international investor conference, Reuters reports.

Largest owners of Zillow’s class A common stock*

Owner Number of shares (% of total)
Caledonia Investments Limited 6,260,390 (18.19%)
Lloyd Frink, Zillow co-founder 6,913,978 (17.02%)
Richard Barton, Zillow co-founder 6,475,848 (15.94%)
Cavalane Holdings 3,006,313 (8.74%)
Tiger Global Management LLC 2,543,956 (7.39%)
Morgan Stanley 2,199,154 (6.39%)

Source: Zebra Holdco (holding company formed to accommodate the Zillow-Trulia merger) regulatory filing *As of Oct. 9, 2014.

The real estate industry and investment world perked up when Zillow’s valuation shot past real estate brokerage and franchisor giant Realogy’s in June.

Zillow’s market capitalization has retreated a bit since then, falling below the $5 billion mark. But the company’s share price has been on the rebound lately, surging 28 percent from its low for the month of $94.23 on Nov. 6 to close at $120.96 today.

Shares in Zillow could get a boost when it absorbs its largest competitor, Trulia, which has a market cap of around $1.8 billion. That deal is expected to close early next year, after the Federal Trade Commission completes its review of how the proposed merger would affect the competitive landscape.

A valuation of $50 billion would put Zillow in a league of its own in the residential real estate business. It would also catapult Zillow’s market cap past its co-founders’ previous startup, Expedia, and into territory occupied by Yahoo, Priceline Group and eBay.

Company Market Cap*
News Corp. (owner of Move Inc., operator of realtor.com)** $8.7 billion
Zillow $4.84 billion
Trulia $1.82 billion
Re/Max $350 million

Source: Google Finance *As of close of market on Nov. 19, 2014 ** Owns many non real estate-related properties

Zillow’s soaring valuation has been fueled by its popularity with consumers, and expectations for future revenue growth.

The Internet has become an integral part of the residential real estate business — the vast majority of homebuyers start the process online — and Zillow’s on its way to being the category’s Google.

The trajectory of real estate portal leaders in other countries also leads to Caledonia’s bullish outlook on Zillow, Messara said.

Michael Messara, senior portfolio manager at Caledonia Private Investments, talks to Stephanie Ruhle and Erik Schatzker on Bloomberg Television’s “Market Makers.”

REA Group, operator of Australia’s leading portal realestate.com.au, for example, is on track to bring in $437 million (Australian) in revenue in 2014, including $392 million from the Australian portion of its business. That’s more than Zillow in a much smaller market.

As of Oct. 9, Caledonia owned 18.2 percent of Zillow’s class A common stock, making the hedge fund Zillow’s largest shareholder.

Consumer audience and the advertising pie

The stratospheric potential of Zillow’s valuation rests, in part, on its ability to more fully monetize its consumer audience, Messara said. Currently, Zillow’s share of real estate broker and agent ad spend is just one-eighteenth of its Web market share, he said.

The assumption, shared by Zillow CEO Spencer Rascoff, is that Zillow’s consumer dominance will translate into a greater proportion of the ad dollars brokers and agents spend online.

The online audience leader in a category typically attracts an even greater share of that category’s ad spend than the share of the audience it owns, Rascoff said in a first-quarter 2014 earnings call with investors.

In August, zillow.com captured almost half of all unique visitors to real estate sites, according to comScore data. That was close to twice the share of visitors to trulia.com, operated by Trulia, and a little more than double realtor.com’s visitors.

Unique visitor traffic* to most popular real estate sites, August 2014

Website August mobile and desktop unique visitors % of total unique visitors to real estate sites in August Percentage point difference July – August
zillow.com 49.3 million 47.7% 0.9%
trulia.com 30.2 million 29.2% -0.9%
realtor.com 24.1 million 23.4% 0.3%

Source: comScore *Includes traffic from desktop computers and mobile devices (mobile Web and native apps)

The numbers above don’t include the unique visitors that come to the suite of sites Zillow owns or has partnerships with including MSN Real Estate, AOL Real Estate, HGTV’s FrontDoor, HotPads and one of the five most popular real estate sites in the U.S., Yahoo Homes.

Zillow’s online leadership may get a shakeup as realtor.com is tweaked by its new owner, News Corp., and more fully integrated into the global media giant’s various publications, which include The Wall Street Journal and Barron’s.

Zillow projects its full-year 2014 revenue will be in the $328 million range. That’s 3.2 percent of the $10.3 billion that Borrell Associates Inc. projects brokers and agents will spend on advertising this year.

Not only does Rascoff expect Zillow to capture a larger portion of the current $10.3 billion pie that brokers and agents spend on online ads, he says the pie itself could double or triple in size.

As stand-alone firms, Zillow and Trulia are projecting full-year revenues of $1.6 billion and $1 billion, respectively, by 2019. Those projections jump to $4 billion and $2 billion, respectively, for 2023.

Either way, Zillow’s revenue, and its valuation, is due for a huge jump if the assumption is true that advertising dollars will eventually track more closely with consumer mindshare.

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