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Zillow (ZG) Up 36.4% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Zillow Group (ZG - Free Report) . Shares have added about 36.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Zillow due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Zillow Group Reports Q1 Loss, Tops Revenue Estimates

Zillow Group reported first-quarter 2019 non-GAAP loss of 2 cent per share narrower than the Zacks Consensus Estimate loss of 22 cents. However, the company reported earnings of 7 cents per share in the year-ago quarter.

Total revenues increased 51% year over year to $454 million and outpaced the Zacks Consensus Estimate of $432 million. The figure surpassed management’s guided range of $417-$443 million.

Strong improvement of the company’s Premier Agent Business and addition of Home revenues primarily drove year-over-year revenue growth.Further, robust demand for Zillow Offers drove the reported quarter’s revenues.New construction marketplaces and Rentals also aided growth. Zillow Group is striving to increase audience size and improve consumer engagement via advertising and other related marketing initiatives.

In second-quarter 2018, the company started reporting results in two segments; namely Internet, Media & Technology (IMT), and Homes.

The IMT segment will comprise the Premier Agent, Mortgages, Rentals, dotloop and display revenues. Revenues from new construction marketplaces, marketing, and business products and services catering to real estate professionals will also be reported under IMT.

The Homes segment will comprise the company's buying and selling of homes directly.

Revenue Details

IMT segment revenues increased 6% year over year and came in at $298.3 million during the reported quarter.

Zillow Group delivered Premier Agent revenues of $217.7 million (47.9% of total revenues), increasing approximately 2% year over year.

In the first quarter, Rentals revenues surged 30% on a year-over-year basis to $37.8 million. Robust growth in number of average monthly monetized, more rental listings on mobile apps and websites drove year-over-year improvement.

Moreover, Mortgages revenues increased 44% year over year to reach $27.4 million. The year-over-year increase can primarily be attributed to strong consumer demand and incremental revenues from the new mortgage originations service.

Other revenues came in at $42.7 million, up 12% year over year, primarily on account of 325% year-over-year increase in revenues from New Construction marketplace and dotloop.

During the reported quarter, traffic increased about 3% to more than 181 million average monthly, unique users. During the quarter, visits improved 14% year over year to more than 2 billion.

Management noted that the high visitor rate was driven by improvement in product lines, which increased app downloads. The increase in visitors is a positive as it enhances probability of generating leads for agent advertisers.

Premier Agent Direct program enables agents to advertise on Zillow, Trulia, and Facebook.  Newly added feature to the program, that enables a marketing link to be established with customers, is enhancing user-experience as it automatically generates printed postcards and mails to customers.

During the reported quarter, the company unveiled Zillow brand that includes the latest shopping experience on mobile apps and website.

Coming to Homes segment, revenues came in at $128.53 million, more than management’s guided range of $100-$115 million. During the quarter under review, Zillow Group bought 898 homes and sold 414 homes.

During the quarter the company launched Zillow Home Loans, a step to integrate “a digital payments platform for mortgage financing to Zillow Offers consumers and other borrowers.”

In the first quarter, the company received greater than 35,000 Zillow Offers seller requests in eight markets The company plans to operate in around 20 markets by the end of first-quarter 2020.

Further, the company is exploring Zillow Offers’ complementarities with other marketing initiatives. Notably, the company acquired Mortgage Lenders of America (MLOA) and rebranded it as Zillow Home Loans. This enabled the company to deploy Zillow Home Loans payment option via Zillow Offers, consequently strengthening service.

Margins and Balance Sheet

Adjusted EBITDA as a percentage of revenues came in at 5% as compared with 15% reported in the year-ago quarter, primarily due to higher expenses and the impact of compensation increase from the highly competitive market.

Total operating expenses during the quarter increased 66% year over year to $516.8 million. The increase was primarily due to purchase and sale of homes in Zillow Offers business.

As of Mar 31, 2019, cash & cash equivalents and short-term investments were more than $1.5 billion as compared with $1.55 billion reported in the previous quarter.

Cash flow used from operating activities was $145.5 million during the quarter.

Guidance

Management expects second-quarter 2019 revenues to be in the range of $568-$594 million.

The company expects Premier Agent revenues in the range of $228-$233 million and mortgage revenues of $24-$27 million. Homes segment revenues are anticipated to be in the range of $230-$245 million.

Total IMT segment revenues for the second quarter are expected to be in the range of $314-$3221 million.

Adjusted EBITDA is anticipated to remain in the range of $11-($5) million.

nagement also updated guidance for 2019. The company now expects Premier Agent revenues in the range of $910-$930 million (previously $905-$930 million) and continues to expect mortgage revenues of $100-$115 million.

Total IMT segment revenues for fiscal 2019 are now expected to be in the range of $1.253-$1.281 billion (previously $1.246-$1.281 billion).

For long-term, Zillow Group intends to purchase 5,000 homes per month at annualized segment revenues of roughly $20 billion.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted -11.77% due to these changes.

VGM Scores

Currently, Zillow has a poor Growth Score of F, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Zillow has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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