Zillow Group
- Solid 3Q beat but guidance is for a weak 4Q: Premier agent revenue -27% year over year expected in 4Q and mortgage revenues -66%
- The leading US residential real estate portal with 2/3 of US home transactions utilizing Zillow’s real estate products
- iBuying business was a bust and destroyed shareholder value
- Serious headwinds with 7% mortgage rates and low housing inventory
- Balance sheet is strong with $1.8bn in net cash
Challenges ahead
Zillow's stock is down 85% off its 2021 high and down 50% year to date.
The 3rd quarter results were solid with revenues and EBITDA beating consensus quite handily. However, their 4th quarter guidance is for a sharp deterioration of their business with Premier agent revenue of $250-270m -27% y/y (decelerating from -13% in the 3Q) and mortgage revenues -66% in the mid-point of their guidance.
With mortgage rates at over 7% (3% one year ago), we are in a new regime as we haven’t seen mortgage rates like this since the year 2000. Needless to say, mortgage rates and decrease in wealth from the stock market fall is hurting affordability and it is no surprise that demand is drying up fast. Mortgage purchase applications closed September down 12.6% week over week and down 36.9% year over year. Single-family housing starts dropped nearly 19% in September. Meanwhile, the amount of building permits allocated fell 17%. This trend won’t be broken until we see lower mortgage rates which aren’t likely to come until the Fed starts to cut interest rates or we are in a deep recession.
“When coupled with persistently low inventory and continued lackluster flow of new listings, the setup to begin 2023 in housing looks challenged,” Zillow CEO Rich Barton wrote in his third quarter letter to shareholders.
Long term potential for Zillow
On the positive side, Zillow is the most visited real estate platform in the US and they are finding ways to monetize this traffic. According to comScore, Zillow has 50-60% share of total visits to real estate websites in the US; but just 8% of real estate agent/broker ad spend. There is a big potential gap to close there. Their real time tour scheduling application is becoming widely available and is showing encouraging adoption amongst agents and consumers. On the negative side, with the macro headwinds, ad spending is going to be hurt just like we are seeing from Google and Meta’s results and with low inventory and weak housing demand, it is going to especially challenging for advertising in the real estate sector.
After ditching their iBuying businesses, the company is back to a high margin tech company with 90%+ gross margins. It is an attractive company to own when interest rates pull back and the Fed becomes accommodative again. For now, it is best to keep this on your watch list.
Are you bullish or bearish on Zillow's growth prospects?
