Although Zillow’s [Z] share price is up 84.07% from 52 weeks ago, it’s down 16.19% year to date through 7 June to $114.40.
Zillow’s share price has fallen 47% from its all-time high of $212.40, which it hit on 16 February.
Zillow’s share price has followed a similar pattern to that of competitor Redfin’s [RDFN], which is down 11.27% year to date, down 39.39% from its 22 February all-time high of $98.44, and up 70.70% over the last year (to 7 June’s close). Both have underperformed the broader housing market sector.
The Hoya Capital Housing ETF [HOMZ], which holds both, has a year to date daily total return of 23.83% and has returned 96.28% in the last 52 weeks, according to Yahoo Finance data.
A strong housing market
Despite the share price suggesting otherwise, the Seattle-based company has been a beneficiary of a strong housing market, which is currently being driven by low mortgage rates and demand outstripping supply. Another factor is people wanting to move out of larger cities as many come to realise they can work from home, and others just look to relocate.
“Looking forward, we believe the tailwinds we have been talking about — from the Great Reshuffling and the offline-to-online technology migration, to positive demographic trends and pent-up demand for housing post-pandemic — are supportive of housing in 2021 and over the long term,” Rich Barton, CEO of Zillow, wrote in his Q1 2021 shareholder letter.
"We believe the tailwinds we have been talking about ... are supportive of housing in 2021 and over the long term" - Rich Barton, Zillow CEO
Zillow had a difficult first half of fiscal 2020 as the COVID-19 pandemic started to bite and put the housing market on hold. It posted net losses of $163m and $84m in Q1 and Q2 respectively, before swinging to a profit of $40m and $46m in Q3 and Q4. Revenue for the full-year was $3.34bn, up 22% from 2019.
The profit streak continued in Q1 2021 with a net income of $52m, while revenue was $1.218bn, up 8.17% from the year-ago quarter.
Zillow has projected the average value of a home in the US will have increased 13.5% by mid-2021, falling slightly to 10.5% by the end of the year. Annual sales are expected to be at their highest level since 2006.
Attracting the Reddit crowd
Despite Zillow’s bullish outlook on the US housing market, the company’s guidance for Q2 2021 suggests there might be some short-term slowdown in activity.
Revenue for the three months to the end of June is expected to be between $1.24bn and $1.28bn versus the consensus among analysts polled by Zacks of $1.27bn. Although this would be a significant jump on the $768.35m posted in Q1 2020, it would only be a slight increase on the previous quarter.
The EPS consensus is $0.23, far better than the loss of $0.17 in Q2 2020, but a big decline from the first quarter EPS of $0.43. The weak guidance could explain why Zillow has reportedly attracted the attention of the Reddit crowd. This and the fact that the share price is almost 50% down from its all-time high.
But not everyone agrees with Bank of America’s [BAC] conclusion that it will become a meme stock. Writing for InvestorPlace, Brenden Rearick says: “This is not to say Zillow is not a strong play. However, trends on r/WallStreetBets suggest it is not about to pop as a Reddit stock. In fact, other sentiment trackers like Swaggy Stocks have identified BlackBerry [BB] as the next big thing.”
"This is not to say Zillow is not a strong play" - Brenden Rearick, InvestorPlace
Rearick points out that the top 10 stocks highlighted by Bank of America had a combined 8,852 mentions in the week prior to his piece being published on 3 June. Just 0.5% of these were for Zillow. Eighty-seven percent — 7,754 — were for AMC [AMC] and GameStop [GME].
Even if Zillow does get pumped by retail investors, there are red flags. Most notably, the stock’s current P/E ratio is nearly 500 even though it is yet to post a fiscal year profit. As ever, investors should proceed with caution.