Zillow Group Inc. (Z) is an American online real estate marketplace established in 2002. It is the most visited real estate website in the United States. It offers customers an on-demand, full-service experience for buying, selling, renting, or financing properties in dozens of markets across the country.
I am bullish on Zillow Group because its strong core online-based real estate services and depressed stock price provide an attractive entry point for long-term-oriented investors. (See Analysts’ Top Stocks on TipRanks)
Strengths
Zillow offers its customers data on approximately 110 million homes in the United States. The company has created a strong portfolio of real estate-oriented technology businesses by making many smart acquisitions since 2011, including Postlets, Diverse Solutions, RentJuice, Buyfolio, Lincoln, NE, HotPads, StreetEasy, and Trulia.
In 2013, the company also began to power AOL Real Estate, and in 2014, it acquired MSN Real Estate portal. In October 2017, the company decided to add 3D tours of houses in their listings.
In January 2019, the company had 36 million unique visitors, reflecting its online platform’s immense popularity and power.
Recent Results
Zillow announced the results of its 2021 third quarter, which ended September 30. The company reported consolidated quarterly revenue of $1.7 billion. Its IMT segment saw revenue growth of 16% from the previous year to $480 million, and the Premier Agent segment saw revenue growth of 20% from the third quarter of 2020 to $359 million.
The company’s Homes segment reported revenue of $1.2 billion, which was below the company’s third-quarter outlook of $1.45 billion. The decreased earnings were attributed primarily to capacity constraints in resale and renovation.
The mortgages segment showed 30% year-over-year growth to 470 million, beating the company’s outlook for the quarter.
Zillow also reported a consolidated GAAP net loss of $328 million in the third quarter of 2021 and a consolidated adjusted EBITDA loss of $169 million. The company ended the quarter with cash, cash equivalents, and investments of $3.2 billion.
Zillow also announced its plans to wrap up Zillow Offers, its iBuying service. The wind-down will be phased across several quarters and will result in a 25% reduction of Zillow’s workforce.
For its fourth quarter of 2021, the company is expecting a loss of $240 million to $265 million, chiefly on homes it hopes to sell in the fourth quarter of 2021. Due to renovation and resale capacity constraints, the company has also pushed some closings expected to be implemented in the third quarter into the fourth quarter.
Valuation Metrics
Zillow’s stock looks attractively priced at the moment as it trades at 52-week lows and is expected to generate record revenue, EBITDA, and net income in 2022 (see Z stock charts on TipRanks).
Wall Street’s Take
From Wall Street analysts, Zillow earns a Hold consensus rating, based on two Buys, three Holds, and one Sell assigned in the past three months. Additionally, the average Zillow price target of $110.50 puts the upside potential at 71.1%.
Summary and Conclusion
Zillow is going through a rocky stretch right now. The company bought an extensive portfolio of single-family homes through its iBuying business. However, it is now being forced to sell at a loss as the company realized that its pricing algorithm was not as effective as initially thought. Furthermore, Zillow is shutting down its iBuying business altogether, which significantly reduces the revenue growth outlook for the company.
Nevertheless, the company currently trades at 32x expected 2022 EBITDA. Its core online businesses enjoy significant network effects and offer the company numerous avenues to generate high growth rates for many years to come. On top of that, the consensus price target on the stock implies that significant upside could be in store for the stock over the next year.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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