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Why Is Zillow (ZG) Up 20.7% Since Last Earnings Report?

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It has been about a month since the last earnings report for Zillow Group (ZG - Free Report) . Shares have added about 20.7% 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 the most recent earnings report in order to get a better handle on the important drivers.

Zillow Group Reports Q3 Loss, Revenues Top Estimates

Zillow Group reported third-quarter 2019 non-GAAP loss of 12 cents per share narrower than the Zacks Consensus Estimate of a loss of 22 cents. However, the company had reported earnings of 18 cents per share in the year-ago quarter.

Total revenues soared 117% year over year to $745.2 million and outpaced the Zacks Consensus Estimate of $714 million.

Strong improvement in Homes segment and momentum in Premier Agent business primarily drove year-over-year growth. Further, robust demand for Zillow Offers facilitated top-line improvement.

Homes segment revenues (51.6% of total revenues) came in at $384.6 million, surging from the year-ago reported figure of $11 million. During the quarter under review, Zillow Group bought 2,291 homes and sold 1,211 homes. In the third quarter, the company received more than 80,000 Zillow Offers seller requests.

In the third quarter, Zillow Offers commenced operations across eight new markets, Portland, Nashville, Miami, San Diego, San Antonio, Austin, Fort Collins and Colorado Springs. The company operates in 21 markets.

IMT segment revenues (45%) improved 7% year over year and came in at $335.3 million during the reported quarter on robust Premier Agent Business.

Premier Agent revenues came in at $240.7 million, improving approximately 3% year over year.

Rentals revenues improved 19% on a year-over-year basis to $44.4 million.

Other revenues came in at $50.2 million, up 15% year over year.

Mortgages segment revenues (3.4%) increased 37% year over year to reach $25.3 million. The year-over-year increase can primarily be attributed to higher revenues from Zillow Home Loans.

Key Metrics

During the reported quarter, traffic increased 5% year over year to 195.6 million average monthly unique users. Visits improved 11% year over year to approximately 2.105 billion.

Margins

Adjusted EBITDA as a percentage of revenues came in at 2% as compared with 19% reported in the year-ago quarter, primarily due to higher expenses.

Adjusted EBITDA as a percentage of revenues for Homes segment came in at (18%) compared with (122%) reported in the year-ago quarter. The same for IMT segment came in at 27%, expanding 300 bps year over year on cost control initiatives and improvement in management of operations.

Meanwhile, adjusted EBITDA as a percentage of revenues for Mortgages segment came in at (29%) compared with 23% reported in the year-ago quarter owing to higher expenses on mortgage origination business.

Total operating expenses during the quarter soared 125% year over year to $793.7 million. The increase was primarily due to purchase and sale of homes in Zillow Offers business.

Balance Sheet & Cash Flow

As of Sep 30, 2019, cash & cash equivalents and short-term investments came in at $2.32 billion compared with $1.44 billion reported in the previous quarter.

The company ended the quarter with long-term debt of $1.479 billion as compared with $716.8 million reported in the prior quarter.

For nine-months ended Sep 30, 2019, net cash used in operating activities came in at $670.3 million.

Guidance

Management expects fourth-quarter 2019 revenues to be in the range of $790-$825 million.

Fourth-quarter 2019 mortgage revenues are anticipated to be in the range of $17-$20 million. Homes segment revenues are anticipated to be in the range of $465-$490 million.

Total IMT segment revenues for the fourth quarter are expected to be in the range of $308-$315 million. Premier Agent revenues are anticipated in the range of $225-$229 million.

Total Adjusted EBITDA is anticipated to come in the range of ($43) to ($25) million.

The company plans to operate in around 26 markets by mid-2020. The company intends to commence operations in Los Angeles in the fourth quarter.

For 2019, the company expects 2019 revenues to be in the range of $2.589-$2.624 billion.

Management updated segmental revenue guidance for 2019. The company now anticipates Total IMT segment revenues and Premier Agent revenues in the range of $1.265-$1.272 billion (previously $1.250-$1.270 billion) and $915-$919 million (previously $900-$915 million), respectively.

Mortgage segment revenues for fiscal 2019 are now expected to be in the range of $97-$100 million (previously $90-$100 million).

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -17.14% due to these changes.

VGM Scores

At this time, Zillow has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Following the exact same course, 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 indicates a downward shift. 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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