Precarious post-verdict market, competition a threat to Zillow 

As the industry adapts to a changing business climate spurred by the landmark Sitzer/Burnett verdict, many residential real estate companies and organizations could be facing some level of exposure — but Zillow may be especially vulnerable, a prominent Wall Street short seller suggests in a lengthy analysis on the company. 

Uncertainty as the industry waits for a final judgment in commissions cases

Zillow could see a falloff in revenue if buy-side commissions are decoupled from home sales, suggests Spruce Point Capital Management Founder Ben Axler. That's because any meaningful reduction in buyer agent compensation would mean less money for real estate professionals to spend on marketing or leads, he said.

This could be particularly harmful to Zillow, whose business model has relied heavily on agent advertising, even as the company continues to focus on growth and diversifying its business.

"Zillow is very dependent on broker relationships, particularly buy-side brokers. And certainly if the commission structure shrinks in the real estate industry, it means there's a smaller pool of money to spend on real estate services, and Zillow won't be unaffected by that," Axler told Real Estate News, further suggesting that the majority of Zillow's revenue is tied to residential real estate.

Former Zillow CEO Spencer Rascoff has also spoken about the threat of weakening buyer agent compensation to the company's revenue stream. Last summer, Rascoff told Real Estate News that "if cooperative compensation goes away, the value of buyer leads is suddenly diminished and the enormous money-making machine that is the Premier Agent business of Zillow is suddenly called into question."

Compensation changes aren't the only risk

But even if there's no major upset from the outcome of the class action suits, the Seattle-based real estate giant faces other headwinds in growing its lucrative Premier Agent business due to its maturity and market saturation, Axler said in the report.

"Our research indicates [Zillow's] core revenue model is saturated in selected markets, meaning all the desirable ZIP codes across the U.S. are sold out and there is very little interest shown by agents for the less desirable ones. In addition, our research indicates pricing is fully baked as lead quality has deteriorated over the years."

Competition from CoStar

To make matters more difficult, CoStar's billion-dollar investment in Homes.com has the potential to upset Zillow's dominance in the home search space, and its newly rolled out subscription model could undercut Zillow's agent offerings. 

"CoStar has a history of successfully disrupting advertising real estate marketplaces (Apartments.com) and Zillow thus far seems to be ignoring the Homes.com threat," the report reads. "Spruce Point interviewed a former Senior Executive that made the comment that Homes.com could have the ability to undercut Zillow's Flex pricing with a 20% referral fee vs. the 35-40%."

CoStar CEO Andy Florance and Homes.com president Dave Mele have repeatedly told investors and industry media that the company is set on overtaking Zillow in traffic. 

Last September, the company claimed to have become the second-most visited real estate home search site, though data from independent web traffic watchers suggested that the race was closer than described by CoStar execs.

"Historically, there have been players who may have been satisfied with being number two or number three. We aren't," Mele told Real Estate News in October. "We are very clearly going for number one. It's our goal to be number one."

Regardless, CoStar remains an existential threat to Zillow, Axler believes. 

"We think they're a very incredible competitor," he told Real Estate News. "CoStar is a company that's three times the size of Zillow, and when they say they're going to do something, we take them at face value — we think it's an underappreciated risk to the Zillow investment story."