Zillow Group: Flawed Business Model, Massive Losses

Zillow Group (NASDAQ: ZG) is an online real estate marketplace company.

The company provides real estate and home-related information marketplaces on mobile and the web. It operates through three segments: Internet, Media & Technology (IMT), Homes, and Mortgages. Zillow was incorporated in 2004 and is headquartered in Seattle, Washington.

The fact that ZG stock has had losses of about 57% over the past year does not make me bullish on the stock.

On the contrary, I am bearish on Zillow Group as the company is unprofitable, and its business model has yet to prove its effectiveness in delivering value to the shareholders.

It is hard to believe that Zillow Group will be among the top stock picks for 2022, or that investors will be too excited about it.

Zillow Group Business News

The digital real estate company revealed on January 4 that, “the hottest housing market of 2022 will be Tampa, according to a new Zillow® analysis. Rounding out the top five are Jacksonville, Raleigh, San Antonio, and Charlotte in what is anticipated to be another hot year for housing across the Sun Belt.”

On the other spectrum “New York, Milwaukee, and San Francisco should be the coolest housing markets in 2022, but sellers will have the upper hand even in cooler markets.”

Other business news includes “a partnership with Down Payment Resource to help home shoppers discover the wide variety of down payment assistance programs that can make homeownership more attainable, especially for first-time home buyers.”

What about useful trends in U.S real estate for 2022? On top of the list for homeowners’ resolutions for 2022 are to add space and remodel the bathroom.

The pandemic has shifted consumer behavior preferences significantly as people amid lockdowns spent so much time at home, that they undertook many renovations.

The business decision to exit the iBuying business in 2021 was a very important one that has to do with the financial performance of the company.

Zillow Group lost money in this business venture. It is fine yet unpleasant to fail, and it is finer to accept that bad decisions in business cannot be supported forever.

Q3 2021 Earnings

ZG earnings in Q3 2021 were a miss. GAAP EPS of -$1.29 was a miss by $1.17.

Revenue of $1.74 billion was also a miss by $269.01 million. Consolidated GAAP net loss was $328 million, and consolidated gross profit of $241 million had an approximate 42% year-over-year decline.

Other negative news was the year-over-year decline of about 4% for the average monthly unique users, while total visits also experienced the same year-over-decline of 4%.

Fundamentals

A red flag of paramount importance is that in Q3 2021 the firm had cash and investments of $3.2 billion on its balance sheet.

The reported negative free cash flow of $2.82 billion in this quarter signals that the firm has less than a year of cash runway.

Valuation

Shareholders have been diluted in the past year, with total shares outstanding growing by 9.5%.

This is negative news for the intrinsic value of ZG stock. Zillow Group is relatively overvalued based on its P/B Ratio (2.7x) compared to the U.S. Real Estate industry average (1.7x).

Wall Street’s Take

Turning to Wall Street, Zillow Group has a Hold rating based on six Buy, 10 Hold, and two Sell ratings. The average Zillow Group price target of $88.44 represents 48.2% upside potential.

Bottom Line

Zillow Group has been reporting net losses in the past five years, despite robust sales growth.

Q3 2021 financial results showed a quarterly sales growth of 32.57%, yet a very large net loss of $328.17 million and a similar negative free cash flow figure.

Until the business model shows remarkable progress, the stock is expected to face a tough time in 2022.

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Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.