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Zillow Inc (Z): What Should Investors Do?

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Zillow Inc (NASDAQ:Z)Zillow Inc (NASDAQ:Z) has become trendy, so it probably wasn’t a surprise to see the stock lose ground initially after a blowout quarter.

Yes, the fast-growing real estate website operator had a monster quarter.

Revenue soared 71% to $39 million, fueled by an 87% surge in marketplace revenue. This segment — which now accounts for nearly 80% of Zillow Inc (NASDAQ:Z)’s business — consists of real estate agents and mortgage providers paying up to get noticed on the site. There are now 34,030 premium subscribers on Zillow paying a monthly average of $259 a month for enhanced access to the site’s growing user base.

Zillow’s investments in growth initiatives are stinging margins, but the widening deficit of $0.11 a share is actually less than the red ink that Wall Street was expecting.

Momentum is building, and Zillow Inc (NASDAQ:Z) is raising its top-line guidance. The dot-com darling now sees revenue of $178 million to $182 million this year, growing 52% to 56% from 2012.

Yes, this is all pretty impressive. Why did the stock take a hit?

Well, keep in mind that the shares hit an all-time high yesterday heading into the report. The stock has been rallying for months as enthusiasm builds for this indisputable housing recovery.

It was back in September when noted worrywart Citron Research skewered Zillow Inc (NASDAQ:Z)’s valuation and business model. The stock has gone on to climb 42% higher through yesterday’s close. If the valuation seemed steep then, imagine how Citron feels now?

The problem with the bearish knock on the model is that it is working. The number of Premier Agents on the site have grown by 83% over the past year. Critics will argue that Zillow Inc (NASDAQ:Z) — and any other website beyond Move Inc. (NASDAQ:MOVE)‘s official Realtor.com hub — is merely trying to milk marketing revenue by repurposing listings as leads for agents willing to pay for premium placement.

So what?

Google Inc (NASDAQ:GOOG) has been deliciously doing this for years, awarding keywords of popular search terms to the highest bidders. There was some backlash during the pioneering days of paid search, but everyone accepts the model of sponsored results. Google Inc (NASDAQ:GOOG) — which also hit an all-time high yesterday — is now a $284 billion company. That would have never happened if it kept query results purely organic.

Agents are flocking to Zillow because that’s where the home buyers are and sellers are going. Zillow attracted 52 million unique visitors last month.

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