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Zillow (ZG) Down 23.6% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Zillow Group (ZG - Free Report) . Shares have lost about 23.6% in that time frame, underperforming the S&P 500.

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

Zillow Group Reports Q2 Loss, Revenue Tops Estimates

Zillow Group reported second-quarter 2019 non-GAAP loss of 14 cent per share narrower than the Zacks Consensus Estimate of a loss of 15 cents. However, the company had reported earnings of 13 cents per share in the year-ago quarter.

Total revenues improved 84% year over year to $599.6 million and outpaced the Zacks Consensus Estimate of $586 million. The figure also surpassed management’s guided range of $568-$594 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. The company 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 — 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 $323.7 million during the reported quarter.

Zillow Group delivered Premier Agent revenues of $232 million (71.7% of total revenues), improving approximately 0.5% year over year.

In the second quarter, Rentals revenues surged 28% on a year-over-year basis to $42.7 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 40% year over year to reach $27 million. The year-over-year increase can primarily be attributed to strong consumer demand and incremental revenues from the new mortgage originations service. Further, higher revenues from Zillow Home Loans were positives.

Other revenues came in at $49 million, up 17% year over year, primarily on account of 32% year-over-year increase in revenues from New Construction marketplace and dotloop.

During the reported quarter, traffic increased about 4% to more than 194 million average monthly, unique users. During the quarter, visits improved 14% year over year to more than 2.2 billion.

Management noted that the high visitor rate was driven by improvement in product lines, which in turn 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.  A newly added feature to the program, which 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 extended testing of Flex monetization model. In doing so it enables Premier Agents to pay a fee post closing the transaction with a consumer guide, in lieu of paying for advertising up front.

Coming to Homes segment, revenues came in at $248.9 million, more than management’s guided range of $230-$245 million. During the quarter under review, Zillow Group bought 1,535 homes and sold 786 homes.

In the second quarter, the company received greater than 69,000 Zillow Offers seller requests in 11 markets. The company plans to operate in around 26 markets by the mid 2020, which includes Cincinnati, Tucson, Ariz, Oklahoma City and Jacksonville, FL.

Margins and Balance Sheet

Adjusted EBITDA as a percentage of revenues came in at around 0.4% as compared with 17% 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 soared 98% year over year to $662.1 million. The increase was primarily due to purchase and sale of homes in Zillow Offers business.

As of Jun 30, 2019, cash & cash equivalents and short-term investments were more than $1.4 billion as compared with over $1.5 billion reported in the previous quarter.

Guidance

Management expects third-quarter 2019 revenues to be in the range of $6948-$727 million.

The company expects Premier Agent revenues in the range of $233-$238 million and mortgage revenues of $22-$25 million. Homes segment revenues are anticipated to be in the range of $348-$370 million.

Total IMT segment revenues for the third quarter are expected to be in the range of $324-$332 million.

Adjusted EBITDA is anticipated to remain in the range of $2-($18) million.

Management also updated guidance for 2019. The company now expects Premier Agent revenues and mortgage revenues in the range of $900-$915 million (previously $910-$930 million) and $90-$100 million (previously $100-$115 million), respectively.

Total IMT segment revenues for fiscal 2019 are now expected to be in the range of $1.250-$1.270 billion (previously $1.253-$1.281 billion).

For the 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?

Since the earnings release, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -5.33% due to these changes.

VGM Scores

At this time, Zillow has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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 broadly trending downward for the stock, and the magnitude of these revisions 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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