The Two Faces of Zillow (and Why Investors Should Stay Away)

Zillow Group (NASDAQ:ZG, Z) underwent a stock split in 2015. ZG stock represents Class A shares with voting rights, while Z stock represents Class C shares without voting rights. The two move in tandem, but the Class A shares trade at a slight premium since they control decision-making.

The Zillow logo displayed on a web browser and magnified by a magnifying glass
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In addition to being two stocks, Zillow has arguably been two companies for the past few years. One was an iBuyer that bought houses on speculation and tried to flip them. That business essentially failed last year. The other is a data company that helps drive the market price of homes. That company is doing quite well.

What investors considering buying ZG stock must figure out is what it’s worth.

The Old Zillow

Much of the decline in ZG stock — from a high of $212.40 in February to less than $50 currently — can be attributed to troubles at, and eventually the failure of, the company’s iBuying group.

For the first three quarters of 2021, Zillow reported a loss of $267 million, or $1.07 per share, on revenue of $4.3 billion. When delivering its third-quarter results on Nov. 2, management also announced it would close down its iBuying business. Following the news, ZG stock plummeted from the mid-$90s to the $60s.

Zillow launched its iBuyer program, Zillow Offers, in 2018. In the first quarter of 2021, it purchased 1,856 homes and sold 1,965 homes. In the third quarter, it bought 9,680 homes and sold just 3,032 homes. At the same time, Zillow was competing fiercely with OpenDoor (NASDAQ:OPEN) and Offerpad Solutions (NYSE:OPAD) and bid up prices.

This resulted in a $304 million write-down for the quarter, which the company blamed on “unintentionally purchasing homes at higher prices than our current estimates of future selling prices.” This language is troubling because it indicates management isn’t admitting its failure.

The company is expected to report fourth-quarter and full-year results on Feb. 9. Analysts forecast Zillow will generate $2.76 billion in revenue for Q4 and post a loss of $1.05 a share. But what investors will really be focused on is how Zillow is winding down its iBuying segment.

The New Zillow

The original Zillow was focused on real estate data sites including Zillow, Hotpads, StreetEasy and Trulia. Before Zillow Offers took off, the company had narrowed its annual loss to less than $120 million in 2018 and had positive operating cash flow.

The new Zillow, if you can call it that, competes most closely with, whose data site has been owned by News Corp. (NASDAQ:NWS) since 2014.  After years in Zillow’s shadow, Realtor grew revenue 30% to $180 million in the third quarter of 2021. Meanwhile, News Corp.’s entire digital real estate enterprise generated $426 million in revenue and $138 million in Earnings Before Income Taxes, Depreciation and Amortization (EBITDA).

Assuming Zillow is still No. 1 in listings, you’re looking at a company that could generate $2 billion in business this year with $700 million in EBITDA. For that, investors are paying $12.3 billion. But that’s before the final liquidation of Zillow’s portfolio. This does have value, even if its 5%-10% less than management thought.

Zillow had long-term debt of close to $1.8 billion at the end of September. The hope is most of that is cleared by the liquidation.

The Bottom Line on ZG Stock

Someone is going to get a bargain on ZG stock, but it’s hard to say when that will be. The ongoing liquidation of Zillow Offers’ real estate will make getting a proper valuation difficult for months. The resulting company may be worth just half what the stock now trades at.

It would make sense for Offerpad, OpenDoor, News Corp. or even a private equity firm to evaluate it all and make an offer. But there’s no assurance that the offer price will be at a premium to today’s price.

Unless you’re first prepared to do a lot of math, I would hold off on buying ZG stock for now.

On the date of publication, Dana Blankenhorn held no positions in any company mentioned in this story. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.

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