Zillow Group (NASDAQ:ZG) is a prime example of how badly things can go when you believe overconfidence can make up for poor execution. At least, that’s the takeaway from the real estate listing platform’s failed attempt to dominate the iBuyer business. Unfortunately, it’s not management that’s paying the price. Instead, that would be the investors who bought into ZG stock between late 2020 and early 2021.
As you may recall, during that time frame, there was a lot of excitement surrounding iBuying. Basically house-flipping on a mass scale, iBuying is when companies make instant offers for homes, fix them up, and resell them at a profit. There are several high-profile names that have had success with this innovative business model.
With real estate a seller’s market thanks to the pandemic, the market was confident that Zillow’s move into iBuying would take it to the next level. Instead, it’s been a full on flop. The firm is taking a more than $500 million write-down and is laying off thousands of employees.
An update from the company earlier this month on this issue was well-received by investors. However, while the situation is less messy than initially feared, this alone will not help sustain a comeback. Why is that? Without a new strategy to spearhead a return to high growth, shares will likely stay depressed or near current levels.
ZG Stock at a Glance
In case you are unfamiliar with Zillow’s iBuyer fiasco, here’s a brief rundown. A few years back, when the iBuying industry was emerging, the real estate technology company decided to bet its future on it. Putting a lot of capital, effort, and time into it, this segment saw rapid revenue growth.
Yet, with too much focus on the revenue growth, it put too little focus on a path to profitability. Although intending to eke out a small profit from its house-flipping efforts, this failed to happen. Put simply, it paid too much for too many homes, leaving little room for error.
What was the root cause of this? Management’s bad forecasting of home prices, plus the impact of the labor crunch and supply chain crisis on its ability to profitably fix up its inventory for resale.
ZG stock tanked when the company officially threw in the towel on iBuying when it announced earnings on Nov. 2. Trading for around $96 per share beforehand, shares quickly fell to the $60s. A few weeks after that, it fell to as low as $52.31 per share. Yes, more recently, investors have started to warm back up to the hard-hit real estate play. But while it may have bottomed out (for now), I wouldn’t put too much hope in a speedy recovery.
Comeback Prospects Currently Unclear
As mentioned above, a few weeks back there was a bit of positive news for ZG stock. On Dec. 2, the company announced that its unwinding of the iBuying segment was helping faster than expected, stating that “more than 50% of its homes are now under contract or that it has agreed on disposition terms for them.”
Furthermore, sales from this segment will come in at between $2.3 billion and $2.9 billion. Zillow’s prior guidance called for $1.7 billion – $2.1 billion in iBuyer revenue. On top of this, Zillow Group also announced plans to do a $750 million stock repurchase.
Some may see this update and the stock’s subsequent boost from the low-$50s per share to the low-$60s per share as a sign to get it while its recovery is just warming up. Again though, I don’t see this being the case. Its core listing business (known as IMT in its financials) is profitable and has performed well. Yet, with its rate of growth slowing down, largely due to a cooling housing market, it’s going to be hard to justify a further move higher when the stock today trades for 66.3x analyst estimates for 2022 earnings.
By branching into other areas of real estate technology, I’ll admit it may be able to jolt up excitement for shares again. Yet until this starts to happen, I wouldn’t count on a comeback.
The Verdict on ZG Stock
Earning an “F” rating in my Portfolio Grader, Zillow Group has produced heavy losses and heavier regret for investors. In light of its recent updates and subsequent bounce back to the low-$60s per share, it may be tempting to buy it ahead of a price recovery.
Even so, there’s little out there to suggest there’s one on the horizon. Management has yet to unveil an alternative plan to kickstart growth. The management’s failings during the iBuyer fiasco also dims my confidence that the C-suite will successfully execute a new game plan. On top of this, there’s the uncertainty that the rest of its iBuyer unwinding will go as smoothly as its initial unwinding efforts.
As its chances of making a comeback remain murky, it’s best to stay away from ZG stock.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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