Following a strong fourth quarter in which Zillow Group posted a record $1 billion in annual revenue, the Seattle-based real estate tech company continues to soar on Wall Street, surging 10 points since March 1 and tallying a $10.5 billion market cap for the first time since going public.

The forward momentum, which culminated Tuesday with afternoon trading at $57 a share, reflects growing investor interest in real estate technology, a renewed focus on small- and mid-cap businesses and Wall Street’s widening clarity on Zillow’s overall strategy, analysts said.

“They’re showing that the business model can be profitable,” said Mike DelPrete, a real estate technology expert who has advised startups and portals as an independent consultant in Colorado. “Operating their model in the U.S. is expensive — I mean, they’re spending a lot of money — but what they’ve shown is that it can be profitable and that they can grow revenues faster than expenses — which, from an investor’s standpoint, is always good news.”

The operator of listing portals Trulia and StreetEasy, Zillow last month tallied better-than-projected revenues of $1.077 billion for 2017, thanks largely to its Premier Agent program, which generated $761.6 million in advertising and remains its greatest source of income. The company posted a net loss of $94.4 million for full-year 2017, according to an earnings report. 

Credit: Mike DelPrete

With plans to integrate the Premier Agent app with Zillow’s transaction management portal, dotloop, as early as next month, the company could be banking on a lead conversion model that would potentially drive up ROI, said Ron Josey, an internet analyst with JMP Securities. Investors, he said, could be reacting to an illuminated vision of Zillow’s business strategy.

“In terms of proving out conversion rates — not just getting them, but proving out — it’s all about getting dotloop integrated into the Premier Agent app,” said Josey. “Then they can actually say ‘Oh, okay, this is how many leads I got from Zillow and this is how many I actually closed in a month’ and that will help to prove out the value that Zillow is providing to agents.”

Credit: Mike DelPrete

DelPrete, however, pointed to a gradual decrease in revenue — both in dollars and as a percentage of the company’s revenues — for the Premier Agent program, an indication that Zillow will need to further innovate to continue its upward thrust in the market. 

“The growth is slowing,” said DelPrete. “And if on a quarterly basis you plot out the year-over-year revenue growth from Premier Agents, it’s very clearly slowing. It’s going from 30 percent down to the 20s, and they’re projecting, based on their numbers, 18 percent growth. But this all makes sense. I mean, they’re generating $750 million a year from Premier Agents, so you can’t keep growing at 30 percent. So, depending on where they want to be in terms of their own revenue targets and their own profitability targets, they’re going to have to innovate.”

In an email, a Zillow spokesperson declined to comment on the company’s financial activities.

Meanwhile, investment in real estate over the past five years has grown dramatically, from 0.2 percent in 2012 to 3.3 percent last year, in part due to the recognition by venture capitalists and growth equity investors that the industry can support massive corporate expansion, said Matt Harris, managing director of Bain Capital, during an Inman Connect talk in January. Previously, a majority of real estate investments had been on a smaller scale, Harris said.

Zillow’s biggest institutional investor by far remains Caledonia Investments, the Australian-based hedge fund, but Wellington Management, Vanguard Group and Morgan Stanley all have large stakes in the company, as do C-suite executives Richard Barton and Lloyd Frink.

“The driver here is mega financings,” Harris said, referring not to Zillow but companies industrywide. “Venture capitalists and growth equity investors have come to the conclusion that not only is real estate no graveyard, but real estate is the place where you can build massive companies. Real estate is an industry where you can confidently put $100 million, $200 million — up to, apparently, $4 billion in capital — and expect to triple your money.”

Added DelPrete: “But it’s the stock market, so who knows. It could be rational. It could be irrational. I have no idea. But it’s a reflection of growing investor interest in the real estate space — specifically real estate tech — and what’s going to happen next. That’s where Zillow’s at now.” 

Email Jotham Sederstrom

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