A couple weeks ago, we had the following discussion about Zillow in the Trading With Cody Chat Room:

Cody, I just received this in my email from Zillow. It is a rental property manager toolkit, which is ingenious and helpful. I believe it will drive folks not only to Zillow, but to use Zillow to list their rental properties. I think $Z should be on the Cody list.

A. Steve, I like Zillow a lot. I have written about it many times in years past. I called it one of the greatest apps for all investors because I like to check real estate prices any time I travel. Zillow is ingenious in many ways. I will take a fresh look at it and it’s valuation edits current price and fundamental picture. Thanks for putting it back in front of me. Thanks.

Subscriber follow-up: I think we are going to see a transformation of how properties are listed and sold with Zillow. This is a very, very smart move. The primary reason I use realtors is to get exposure for my property. IfZillow can create that (you don’t need MLS access to list on Zillow), then all of a sudden I can connect to all prospective purchasers without a realtor. I can hire a lawyer to oversee the transaction for well under $5K (actually I am a lawyer, but I am referring to others), as opposed to 5 or 6 percent of my transaction. 

All of a sudden, Zillow starts controlling and directing folks’ access to real estate service providers, such as mortgage companies, property inspectors, termite inspectors, etc. Listers and buyers could register and update their “qualifications” such as mortgage pre-qual, home inspections, etc. This direct connection of buyers to sellers, which would eliminate the 5 to 6 percent cost of realtors, would be a HUGE market.

Okay, Cody back in real-time now.

Put another way, Zillow is the Uber of real estate. Or put yet another way: Zillow is the Netflix of real estate.

See, each of these businesses is about hitting critical mass, using the App Revolution to become the respective de facto standard in local transportation, tv streaming and real estate sales/rentals. Each of the above businesses are not just disrupting hugely inefficient and overpriced industries but they are literally creating secular growth industries that are revolutionizing how we do very common, if not outright everyday, tasks. Once you hit enough critical mass to become the de facto, you can reach near-monopoly status.

Uber’s got enough drivers, enough customers and enough mindshare that it’s become the de facto standard. Uber is worth $50-60 billion right now.

Today’s news that Netflix onto Comcast’s cable set top boxes is just another part of Netflix having hit critical mass as the de facto standard for TV streaming. Netflix is worth $45 billion right now.

Having recently acquired its only competitor, Trulia, Zillow is worth $5 billion right now.

Now I certainly don’t think that Zillow should be worth Uber/Netflix kind of money right now. For one thing, the Real Estate App Revolution and Zillow’s place in it is not as far along as Uber and Netflix are right now.

That said, this company could be huge. In a typical year, real estate brokers in the United States sell much more than $1 trillion worth of homes, making a total average commission of 5.4 percent on each sale. There’s another trillion dollars worth of business, buildings, rentals, and other real estate transactions each year.

That means people are paying well over $100 billion in commissions each year. There’s more than another $30 billion in total real estate ad spending every year. The real estate industry employs over 2 million people, including more than 430,000 agents and brokers. That’s about 1.4% of the working civilian population of the U.S.

Zillow is set to grow revenues about 20-25% per year for the next few years, crossing the $1 billion mark this year. I expect that Zillow can continue to grow 20% per  year for the next five years or more, which would mean the company could be kicking off a few billion dollars a year in cash flow over that time frame.

The one thing that keeps me from going bigger into this stock right now is valuation. The stock trades at 60x next year’s earnings estimates and five times next year’s sales estimates. If the company can deliver 20% growth and continue to establish itself as the go-to app for selling, buying and renting real estate, I think we could see this stock with a valuation measured in tens of billions, implying 5x or more upside in years ahead. If they company fails to execute, well, there’s certainly risk in paying 60x earnings for a stock.

I’m putting a toe hold into this stock tomorrow, starting with a 1/5th-size position in the common stock and will look to add more in coming weeks and/or months if depending on the price and the fundamentals as they play out.