Zillow (Z) is down but not out

Zillow (Z) shares got a swift kick in the nuts thanks to soft Q4 guidance. Q4 guidance is for revenue of $30M-$31M, below a $32.5M consensus. Q4 adjusted EBITDA expected to total $3M-$3.5M, down from Q3's $7.6M.

This is typical Wall Street short-sightedness and a great opportunity to load up on shares below $30.

Here is what investors should be focusing on. Revenues were up almost 67.5% over the year ago period. For the quarter, Zillow reported record third quarter revenues of $31.915 million, which beat analyst estimates of $31.66 million. On an earnings per share front, the company reported a profit of 7 cents per share, matching expectations. In the year ago period, Zillow reported revenues of $19.057 million, and a 2 cent per share loss.

What a lot of investors don't realize are the reasons why Zillow lowered guidance. Zillow is switching from making money primarily on advertising to making money by providing leads to real-estate agents and mortgage lenders. This sounds smart in the long term, because lead generation is a business that adapts much better to mobile, and Zillow is now getting more views of homes on mobile than it is on its desktop website.

Also, Zillow is taking foreclosure listings in-house. To expand its database, Zillow now gets data from county records on foreclosed homes and lists them on its site for buyers for free. It used to sell ads to a company called Foreclosure.com. That revenue has gone away.

Mastery Bottom Line:

Make no mistake, Zillow is still a speculative stock. However, if the housing market is truly bottoming out like many think it is, now is a great time to get in. If you've used Zillow you know how powerful a tool it is. I for one can't imagine buying real estate without it.