Zillow (NASDAQ: ZG), an online real estate database company with over 100 million listings, is the largest such site in the U.S. and has seen revenue growth of over 9000% in the last decade. Although the company saw a 40% decline in visitors at the start of the pandemic, business seems to have returned to normal. In April 2018, the company entered the iBuying industry with Zillow Offers and in November 2018, Zillow acquired Mortgage Lenders of America to further streamline the real estate transaction process for customers. iBuying profit margins however, are paper-thin if any exist at all; therefore, the question must be asked: Is Zillow Group a good investment?
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The bull case for Zillow
In iBuying, or instant buying, iBuyers offer sellers a price based on an automated valuation model (AVM), which uses an AI algorithm to calculate a price; then the home is inspected and repairs are deducted from the final total. This costs, in Zillow’s case, about 2.5% more than traditional brokerage-assisted listings, but the seller is spared the head-aches of showing, negotiating, and repairs. In addition to seeing a visitor decline, Zillow also suspended its iBuying program, Zillow Offers. However, when it did resume in July, it launched in 5 additional markets (24 in total), and saw web traffic to for-sale listings go up 41% from last year, with homes selling at their quickest rate in two years. In fact, browsing for listings and rentals has become not only a necessity for those looking to move (less in-person interaction), but also a pastime for those trying to escape the insanity of the real world. Since interest rates have been lowered during the pandemic, lower mortgage-rates are driving demand for available housing.
This is one of the factors that has boosted Zillow’s Homes division revenue — of which Zillow Offers is a significant part — to over $454 billion in Q2 2020, an increase of over 45% from a year ago. In fact, the division is doing so well, that it accounts for over 59% of the company’s total revenue as of Q2 2020. This is only the beginning as analysts are estimating that by 2025, 60% of real estate sales transactions will be with iBuyers. Additionally, with the coming silver tsunami, millions of boomers’ houses will flood the market and Zillow will stand to profit. Zillow’s stock price was slightly impacted by the pandemic but is up over 85% since the start of year, at $83.49 as of September 8.
The bear case for Zillow
The biggest threat to Zillow’s revenue is a recession or a downturn in the real estate market, in which case the company could be left holding a lot of real estate without buyers. Also, by going into iBuying, Zillow essentially undermines traditional real estate agents; agents who contribute a tidy sum to the company’s Premier Agent segment, which is down 17% year-over-year (YoY) as of Q2 2002. Zillow also reported a net loss of over $84 million, $80 million of which came from the Homes segment, up over 17% from last year. This is because the company loses over $6,000 on each house it flips, on average.
Another concern is climate change, which contributes to hurricanes and wildfires. This year, there will be a total of 25 named hurricanes; that’s second to 2005’s 27, the most of all time. These catastrophes cost billions of dollars in damage to real estate and combined with a downturn or recession, can spell major disaster for Zillow.
So, is Zillow stock a good buy?
This is a tough one as the company was doing wonderfully before embracing the iBuying model. However, Zillow management feels that they’re slowly finding their groove as they overcome a number of growing pains associated with the sector.
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