🏘 Will Zillow Come Out Of Its House Arrest?

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🏘 Zillow: House Arrest?

Pandemic darling Zillow Inc. (ZG) saw shares fall to a two-year low last week. The reason? An underwhelming outlook and a slowing housing market owing to rising interest rates. With the company looking to pivot and start afresh, will investors continue to stay put?

From Hero To Zero

Taking advantage of a booming housing market in the US, online real estate marketplace, Zillow decided to buy and sell homes directly. The iBuying process allowed homeowners to sell instantly on Zillow for cash instead of going through a broker and participating in an extended bidding and closing process. The company called it “Zillow Offers.”

By Q2 2021, Zillow Offers formed half of the company’s overall topline. It came undone when housing renovation costs acquired through Zillow Offers began to shoot up due to labor shortage. That risk only amplified as the housing market slowed down.

Even as Zillow Homes became the core of its overall business model, it ended up biting more than what it could chew. In six quarters over 10 quarters, from Q1 2019 to Q2 2021, Zillow bought more homes than it sold.

Inventory piling up meant that the company had to pause any new signings until the end of the year. What was meant to be an out-of-the-box growth idea opened a Pandora’s box for the company.

In Q3 2021, the company took a $304M write-down and acknowledged it paid a higher price for homes than their estimated future selling prices. It had purchased close to 10K homes during the quarter but sold only 3K. When reality dawned on the company, it decided to exit the Zillow Offers business last November and trim its workforce by 25%.

Zillow lost another $261M in Q4 2021, and all of those came from the homes division. The company shuttered the iBuying business. Superstar fund manager Cathie Wood threw in the towel. Zillow was once ARK funds’ top holding. After purchasing nearly 300K shares on November 2 last year, Wood dumped 6.3M shares of the company over the next 10 days.

Full Stop?

Zillow’s Q1 results may have been satisfactory, but its future outlook spooked investors.

Key Highlights From Q1:

  • Revenue: $4.3B Vs $3.4B expected
  • Earnings Per Share: $0.49 Vs $0.27 expected

Most of the revenue came from Zillow’s home segment due to the faster-than-expected liquidation of its inventory as it continues to wind down the Zillow Offers business.

The company has laid out a new strategy that focuses on a “housing super app.” Zillow plans to connect all the fragmented pieces of the moving process and bring them under one transaction. The company has also identified five new growth pillars for the future – touring, financing, seller services, enhancing partner network, and integrating services.

While Q1 results surpassed expectations, the expectations for the current quarter did the company in. In Q2, the company expects revenue of $967M, compared to Street expectations of $1.81B. The homes business, which contributed to most Q1 revenues, is expected to bring in revenue of ~$450M. A small amount of remaining inventory will spill over into Q3.

The 30-year fixed mortgage rate in the US hit a 13-year high of 5.27% last week. Over the same period last year, that figure stood at 2.96%. New Home sales dropped ~10% in March, while existing home sales were down 3%. Increasing interest rates and high home prices meant the average borrower is paying 38% more on the monthly installment than a year earlier.

All of this does not bode well for Zillow’s mortgage business, revenue for which saw a drop of 32% to $46M. Average monthly unique users for its website was down 5% Y-o-Y to 211M. Its advertising business for real estate agents is expected to bring in revenue of $340M, lower than in Q1.

While technology disruption in residential real estate is a given, whether Zillow can pivot in a slowing demand, rising interest rate environment is a big question. A survey also suggested that the majority of real estate agents will either cut or eliminate ad spending with the company sooner or later.

Shares of Zillow are down 40% this year and have lost two-thirds of their value over the last 12 months. The only saving grace is that they remain above its IPO price of $20. For how long? Here’s CEO Rich Barton after the company’s Q1 results: “The market is softening, full stop.” Go figure.

Market Reaction
ZG ended at $36.09, down 1.18%.

Company Snapshot 📈

ZG $36.09 -0.43 (1.18%)

Analyst Ratings (24 Analysts) BUY 33%  HOLD 58%  SELL 9%

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Later Today 🕒

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Today’s Fun Fact

Japan has one vending machine for every 40 people

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