Some business ideas are bold; others are just bone-headed. Not to pick on Seattle-based Zillow Group (NASDAQ:ZG), but the company should have stuck to its core business instead of exposing ZG stock holders to a doomed foray into house flipping.
Just to recap, around three and a half years ago, Zillow Group announced a new venture into buying properties. This was quite a departure from the company’s long-standing business model. After all, Zillow was and is primarily known as an online platform for buying and selling properties.
Not long ago, the company practically admitted that it had screwed up. This might seem honorable, and it may be tempting to be a hero and conduct a rescue mission with beaten-down ZG stock.
Yet, your role as an informed investor isn’t to be a hero. Zillow Group’s loss isn’t your gain, as a botched business venture isn’t commendable and some sinking stocks should simply be left alone.
ZG Stock at a Glance
Long before Zillow Group admitted its missteps, the company’s shares were already losing their value quickly. The company’s loyal stockholders have only been punished, it seems.
Anyone who bought ZG stock near the $212 peak in February 2021 is probably regretting that hasty decision. The stock declined steadily for 11 months, shaking some unfortunate investors out of the trade along the way.
August was particularly painful as the Zillow Group share price sank below the crucial $100 level. Yet, that’s not even the final chapter of this tragic story.
By early 2022, ZG stock had fallen into the $50s. This type of price action defies technical analysis, as there are no demonstrated support levels to speak of.
Going Underwater, and Drowning
Sometimes, Wall Street analysts’ research can help to point out the depth of a company’s financial problems.
For instance, in early November of last year, KeyBanc analyst Edward Yruma made a crucial observation. He noted how most of the homes that Zillow Group had purchased, with the intention of flipping them for a profit, were now worth less than what the company had paid for them.
After analyzing 650 homes in Zillow’s inventory, Yruma found that 66% were listed below the purchase price, at an average discount of 4.5%.
In other words, around two-thirds of the company’s home investments were underwater.
“Zillow may have leaned into home acquisition at the wrong time,” the analyst opined. Moreover, “we believe earnings may be at risk due to its current home inventory.”
Yruma was being polite, as it was evident that Zillow’s home-flipping business was a complete bust.
Conducting Business Is ‘Really Hard’
Very soon after that report was released, Zillow abandoned its home-flipping business.
At the same time, the company disclosed that it expected losses exceeding $550 million on homes purchased during 2021’s second half, for which the company admitted that it had paid too much.
Adding insult to injury, Zillow also stated that it will lay off around one-fourth of its staff.
On top of all that, Zillow chief executive officer Rich Barton came out sounding more like a middle-school student than a corporate executive, saying, “Predicting the price of homes six months ahead is really hard.”
Apparently, turning a profit is also really hard. A 10-Q form reveals that Zillow managed to incur a $328,174,000 net loss during 2021’s third quarter.
That’s a truly awful result, especially when compared to the year-earlier quarter’s net income (a gain, not a loss) of $39,570,000.
The Takeaway on ZG Stock
As a business, real estate is challenging. There’s little room for error, and Zillow Group got way in over its head.
There’s no point in trying to gauge full extent of the repercussions of Zillow Group’s wrongheaded foray into home flipping. The third-quarter net loss and all of the layoffs might only be the tip of the iceberg. ZG stock gets an “F” grade in my Portfolio Grader.
Even beyond all of that, there’s the embarrassment and the reputational damage that Zillow Group will have to sustain.
With this in mind, holding on to ZG stock and hoping for the best isn’t a viable strategy. And to borrow a phrase from the company’s CEO, earning any profits from an investment in Zillow Group will be “really hard.”
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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