Zillow (ZG) is a digital real estate corporation. It operates in two ongoing divisions; Internet, Media, and Technology (IMT), and Mortgages.
It’s iBuying division, Homes, is being eliminated. Moving forward, the majority of revenues will come from advertising rather than through the buying and selling of houses.
I am neutral on Z stock. (See Analysts’ Top Stocks on TipRanks)
Zillow Halts iBuying
Zillow operated three divisions in the recent past. The largest by revenue being the iBuying division, which included Zillow Offers. Here, the company would purchase homes, fix them, list them, and resell them.
For the nine months ended September 30, 2021 the company pulled in $2.7 billion in revenue from this division. The problem is that the costs of the homes, before even accounting for operating expenses, was $2.8 billion.
This is quite distressing given the rapidly rising prices of homes. If the company cannot make even a gross profit in a rising market, then the feasibility of the segment is highly questionable.
In October of 2021, obviously seeing the writing on the wall, Zillow announced a pause until year-end on home buying. Inventory was backing up and the company was finding it more difficult to sell the homes it had already purchased.
In November, the company announced that it would be winding down the segment altogether. This is likely the best path for the company moving forward, although quite painful to investors. There is also heavy competition from seasoned, private, real estate investors who often have the upper hand in the market as they are nimble and have existing relationships “on the ground.”
IMT Segment to the Rescue?
Of the two remaining segments, the IMT segment made up 90% of the revenues for the nine months ended September 30, 2021. The Mortgages segment is still in its infancy, not profitable, and will need to be reviewed once more results are available.
The IMT segment is profitable and growing, unlike the former iBuying segment. The company posted an 11% operating margin in IMT in the nine months ended in Q3 2020, and an impressive 29% operating margin over this period in 2021.
Revenues for the IMT segment grew 37% year-over-year as well. This provides shareholders with something positive on which to focus. The question is, does this support the current share price?
Taking the last quarter’s IMT revenue and annualizing it would give Zillow $1.7 billion in revenue. The current market cap is still over $13.8 billion making this a difficult value proposition.
Zillow’s stock has fallen from a February 2021 high over $200 per share to a price of just $54 per share recently. This falling knife is likely to keep cutting lower in the near future until the company can stabilize. There may still be more losses coming in the Homes division as well, which will hurt the bottom line.
Wall Street’s Take
Turning to Wall Street, analysts give Zillow a Hold consensus rating. Just six analysts have Buy ratings. There are nine Holds and two Sell ratings.
The average Zillow Group price target of $90.60 implies 67.3% upside potential. This is the result of analyst targets prior to the announced elimination of Zillow’s iBuying division.
Conclusion
Zillow stock has undergone a rerating after announcing the halting of its iBuying segment. Investors who were caught off guard took heavy losses.
On a positive note, the remaining large segment, IMT, is profitable. The stock still is likely to fall further despite this. The results simply do not support a $13.8-billion market cap at this time.
Disclosure: At the time of publication, Bradley Guichard did not have a position in securities mentioned in this article.
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