Zillow (NASDAQ:Z), the online estate agent, is facing a battle with rival Homes.com owner CoStar Group Inc (NASDAQ:CSGP) after the latter came out swinging with its US$1 billion Super Bowl ad.
Jeff Goldbloom, Dan Levy and Lil Wayne were all recruited by Homes.com to star in the high-cost commercials during the NFL final and initially analysts were concerned it could cause problems for Zillow (NASDAQ:Z).
At the group’s fourth-quarter earnings call, management was grilled on the potential threat from Costar, with analysts concerned it could damage revenues in 2024.
Yet, Zillow (NASDAQ:Z)’s management was one step ahead and revealed that its sales growth guidance, which is a double-digit percent rise, has already taken into account the threat from Costar.
In fact, the Washington-based company is expecting to outperform the wider market in 2024, utilising its newly acquired businesses such as Showing Time, Follow Up Boss and Listing Showcase.
However, a billion-dollar ad campaign isn’t the only weapon in Costar’s arsenal, as it plans to spend US$1 billion in “reintroducing” Homes.com.
Costar also has the financial power behind it to follow up with investments.
Its debt sat at US$1 billion as of September, with the single 2.7% loan note due to expire in July 20230. Total cash at the company is at US$5.2 billion.
In comparison, Zillow has US$2.8 billion in cash and US$1.6 billion in debt, with the earliest of its note maturing in September 2024.
“From a cash flow timing perspective, we anticipate Costar has a more advantageous position, but we also think that homes.com has a tall gap to close,” Wedbush said.
Zillow is expected to increase operating expenditures to fight this threat and defend its market share as an industry leader.
So, what else can Zillow do?
Wedbush believes there are three strategies the company can take:
- Do nothing - Continue on with its strategy, trust its reputation as the most visited real estate website in the US and drive growth ahead of the market.
- Fight back - Ramp up spending and attempt to win as much market share as possible.
- Find a teammate – Merge or be acquired by a larger potential partner such as Rocket to create new products like” Zillow Mortgage powered by Rocket”.
While the LA bank is yet to decide which horse to back in the race, it has expressed confidence in Zillow, upgrading its share price target from US$50 to US$60.
Shares in Zillow are trading at around US$58 on Thursday, while Costar shares are at US$83.