Why Zillow will weather the NAR Storm: Analyst

Recently, the National Association of Realtors (NAR) settled an antitrust lawsuit in which a federal jury found that the organization had conspired to artificially inflate agent commissions. The organization was fined $418 million dollars, with a possible added ripple effect on the housing market. Despite this news, analysts at Citi reiterated a Buy rating for Zillow (Z), with a price target of $68 per share.

Citi Senior Internet Sector Analyst Ron Josey joins Yahoo Finance to explain why he thinks the NAR ruling won't be a problem for Zillow,

Josey explains that buy-side agents are sheltered from the settlement's impact, and Zillow's array of offerings may also insulate the company: "Over the past several years, I'd say five plus years, Zillow has been culling their premiere agent base to focus only on those agents that actually return the leads that they're getting from Zillow. On top of that, they've been investing in new productivity tools, they bought Showing Time; they just recently acquired a company called Follow Up Boss. And so you have these newer tools that are helping agents become more effective."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

JULIE HYMAN: Citi reiterating a buy rating on Zillow with a price target of $68. This coming against the backdrop of that $418 million settlement from the National Association of Realtors. Our next guest though, says the impact of that will be minimal.

For more, we're bringing in Citi senior internet sector analyst Ron Josey. Ron, thank you so much for being here. We have spent the past few days trying to wrap our heads around this thing, I'm going to be honest with you, Ron. Because it's sort of a complicated issue and we have seen the negative sentiment flow through to Zillow and some of its competitors. So lay it out for us, why is this not going to be a problem for Zillow?

RON JOSEY: Yeah, so there's a few things. One is the settlement just came out, right? So we're still learning what it means and what the ripple effects are throughout the industry.

But our view here is that the settlement doesn't cancel or get rid of the commissions for buy-side agents. And in fact, you can still move forward with that. A sell-side agent can still do that just maybe not within the MLS. And so our view here is that because commissions can continue and because the seller can potentially continue to do that, we don't envision a major disruption, at least immediately, to the overall business.

Now, to be clear, still early. You know, this thing goes-- the new settlement goes into effect, I think, in mid summer of this year and so we'll have to-- we'll have to see what happens. But frankly, from our perspective, we think that the buy-side agent or agents still provide a lot of value to the consumer or the home buyer, whether you're on the buy side or the sell side. Particularly if you're a first time buyer, it's still a very complicated process. And for that reason, we think commissions can continue.

Regardless though, it's something that we're monitoring, something we're watching. And our view on Zillow is, sort of, bigger picture. If we take a step back, if we don't think things are going to change that immediately, we believe their new call it enhanced market strategy of going close to the transaction with sell-side listings being a big opportunity, rentals, et cetera, there's a lot going on at Zillow that they're in the middle of executing on. And we think that's going to surprise in terms of maybe inflection numbers to the upside.

JOSH LIPTON: So on that last point, Ron, just so I'm following, so part of your thesis is that just Zillow's business has changed. It's just more diverse now, tools, services, rentals. And in some way your bet here is that, kind of, insulates them from potential impact.

RON JOSEY: Yeah, our bet here is we don't think things change that dramatically that immediately. It's possible you do get to some sort of a la carte. But when we take a step back and we think about Zillow's business, look, over the past several years, I'd say five-plus years, Zillow has been calling their premier agent base to focus only on those agents that actually return the leads that they're getting from Zillow.

On top of that, they've been investing in new productivity tools. They bought ShowingTime. They just recently acquired a company called Follow Up Boss. And so you have these newer tools that are helping agents become more effective.

And then you add in the potential for seller listings, and you add in the rentals business becoming bigger, mortgages being a part of it as Zillow becomes part of the transaction. This is the year 2024 when we can actually get into execution of this new strategy as opposed to beta testing and testing all these new ideas over the past several years. And that's really what gets us excited about what's happening at Zillow today.

JULIE HYMAN: Ron, I'm curious, even before this settlement was finalized, there was a short seller who came out with a call against Zillow. And in addition to the settlement or the potential settlement, he also called out the idea of competition for Zillow. So I'm curious how you're thinking about that issue right now.

RON JOSEY: Yeah, it's wild. There's a lot going on within Zillow not notwithstanding, by the way, mortgages being certainly higher than they were several years ago. I think home sales and transactions were at multi-decade lows last year and Zillow's projection expects that to continue this year.

But when we think about competition overall, look, in our view, Zillow is the-- and I think this is a positive-- the Kleenex in the industry. In other words, when you search for a home on Google, most people search for Zillow versus home sales in the zip code from our understanding. And when we look at Zillow trends or even our view on where Similarweb, or Sensor Tower, and third party providers that look at traffic, Zillow always ranks significantly higher than the competition. And on top of that, this is a brand that's been around for a while. And so when we think of the 200 plus million monthly unique visitors that come to Zillow month in, month out, we think it's going to be very hard for a competitor to really come in and disrupt that.