Zillow's Q1 2025 Surge: A Housing Market Outlier with Catalysts for Growth

Zillow Group (ZG) reported a standout Q1 2025, defying a sluggish housing market with 13% revenue growth and margin expansion. Its Enhanced Markets strategy, partnerships, and rental dominance position it as a "best idea" stock for investors seeking resilience in turbulent markets. Here's why ZG could be primed for breakout gains.

1. Rentals & Enhanced Markets: The Growth Engine

Zillow's Rentals segment hit a record $129 million in revenue (+33% YoY), driven by a 47% surge in multifamily revenue. The partnership with Redfin added 5,000 multifamily listings in April 2025, boosting syndication and advertiser leads. This synergy with Redfin highlights Zillow's ability to scale its platform through strategic alliances.

Meanwhile, Enhanced Markets—which integrate Zillow Home Loans, Premier Agent, and Follow Up Boss—now account for 24% of total connections, up from 21% in Q4 2024. Management aims to hit 35% by year-end, with a long-term target of 75% of transactions flowing through this ecosystem. The results are clear: Enhanced Markets contributed to 6% growth in Residential Revenue to $417 million, even as the broader housing market expanded only 3-6% (per NAR/Zillow estimates).

A key metric is the 90% penetration of Follow Up Boss in Enhanced Markets, an AI-driven tool that boosts agent efficiency. This integration reduces friction in buyer-seller interactions, directly linking Zillow's tech stack to revenue growth.

2. Competitive Risks: The Compass Lawsuit and Antitrust Concerns

Zillow faces a high-profile legal challenge from Compass, which sued in June 2025, alleging Zillow's "Listing Access Standards" (effective June 30, 2025) violate antitrust laws. The policy mandates that listings marketed outside Zillow must be posted on its platform within 24 hours or face bans. Compass argues this stifles competition and forces brokers to prioritize Zillow over alternative strategies like its "Coming Soon" phase.

The Tradeoff:
- Short-Term Risk: Legal costs and potential policy rollbacks could disrupt Zillow's growth.
- Long-Term Opportunity: If Zillow prevails, it could cement its dominance in real estate listing visibility, accelerating the shift to a "housing super app" model. Even if the policy is diluted, Zillow's Enhanced Markets and Rentals segments are already outperforming peers.

3. Valuation: Strong Margins, Cash, and Upside Catalysts

Zillow's Adjusted EBITDA hit 26% of revenue ($153M) in Q1, up 200 basis points YoY, reflecting cost discipline and scalable services. Despite a $1.6B cash balance (down from $1.9B due to buybacks), Zillow's liquidity supports both litigation defense and strategic investments.

Growth Catalysts:
- Showcase Monetization: Only 2% of listings currently use Zillow's AI-powered Showcase tool, which boosts sale prices by ~2%. Scaling to 5-10% penetration could add hundreds of millions in revenue.
- Real Time Touring Adoption: Now at 36% of connections (vs. 12% a year ago), this feature reduces friction in booking tours, aligning with Enhanced Markets' integration.
- Margin Expansion: With EBITDA margins up 200 bps YoY, further scaling could push margins higher as Enhanced Markets grow.

At a $18B market cap, ZG trades at a premium to peers but is justified by its growth trajectory. Its EV/EBITDA of 137x is high, but the market is pricing in a winner-takes-all scenario in real estate tech.

Investment Thesis: Buy ZG for Catalyst-Driven Growth

Why Now?
- Resilience in a Slump: Zillow's 13% revenue growth and margin expansion outpace a 3% housing market. Its Enhanced Markets and Rentals segments are decoupling from macro headwinds.
- Catalysts in Sight:
- Showcase's 5-10% adoption target could unlock $200M+ in incremental revenue.
- Enhanced Markets hitting 35% connections by year-end will solidify its "super app" model.
- Zillow Home Loans integration could drive cross-selling synergies.

Risks: The Compass lawsuit, affordability challenges, and regulatory scrutiny remain. However, Zillow's cash position and diversified revenue streams mitigate these risks.

Actionable Take: Investors seeking exposure to real estate tech should consider ZG. While the stock isn't cheap, its strategic execution and market-defying growth make it a compelling "best idea" for 2025.

In a politically charged market, Zillow's focus on unifying real estate services into a single ecosystem offers a rare combination of defensive cash flows and high-growth potential. The Enhanced Markets strategy and partnerships are not just growth drivers—they're a moat against competitors. Buy ZG for its asymmetric upside, and hold through the Compass legal noise.