Zillow – Zillow Shares Sink After Second-Quarter Results Leave Investors Hungry For Better News
Updated Thursday morning.
Investors hoping for calm from a Zillow earnings call were disappointed once again after an adjustment to the company’s earnings expectations sent the stock down 14% overnight. It was the latest in a string of surprises for investors.
Executives spent most of 2018 trying to persuade Wall Street that its foray into buying and selling homes on demand would pay off and not totally decimate its core business selling ads to real estate agents. The street wasn’t buying it.
When the company released fourth-quarter 2018 results in February, it announced that Rich Barton would reclaim the title of CEO—nine years after ceding it to cofounder Spencer Rascoff—in a surprise move that boosted the stock. In May, losing money on its big vision and seeing its competitors building momentum, Zillow said it had more than doubled the number of homes it sold quarter-over-quarter and planned to be in 22 markets within a year.
That left investors looking beyond the company’s outsize ambitions and hoping for signs of stabilization as it announced second-quarter results after the market close Wednesday.
“They have laid the foundation for the vision, and now it is about execution,” Brad Berning, who follows the company for Craig-Hallum Capital Group and has a buy rating on the stock, said before the release.
Zillow did exceed analyst expectations with $599.6 million in sales and a $0.35 per share loss, buying 1,535 homes in the quarter and selling 786. However, the company lowered its full-year outlook for its ad sales business to a range of $1.25 billion to $1.27 billion, from a range of $1.253 billion to $1.281 billion. On the earnings call Wednesday, executives said the adjustment was due to the decision to expand a new model in which agents pay a fee only after a deal is closed.
The three-to-five-year goal is still to buy 5,000 homes a month—about 1% of all real estate transactions—and book home sale revenue of $20 billion a year. By that time, the company expects revenue from selling ads to real estate agents to grow to $2 billion, from $1.3 billion in 2018. (Most analysts do not think these targets are realistic.)
Most of the margin from the new business, however, won’t come directly from the spread on houses. Zillow’s plan is to make more profits on auxiliary services like mortgages and title insurance, as well as from selling leads to buyers’ agents. If it’s selling 5,000 houses a month, it expects to finance loans on 1,650 of them.
Zillow’s remodel is happening as the idea of applying tech to residential real estate transactions seems to be gaining momentum.
Last week, Redfin, a tech-driven discount broker—and sometimes Zillow competitor with home purchases—released better-than-expected second-quarter results. The same day, Opendoor, the original on-demand home buyer, announced plans to move to the buyer side of the transaction. And last month, Compass, a brokerage that pairs human agents with software, announced it had raised a $370 million round of funding at a $6.4 billion valuation.
Zillow’s shares opened trading Wednesday at $48.81, up about 57% since the start of the year but still off their June 2018 high of $65.
For more on Zillow, read our profile of CEO Rich Barton from July.