Zillow Group (NASDAQ: Z, NASDAQ: ZG) posted their results for Q4 2019.

Revenue was $943.9M which was beat analysts’ estimates of $813.99M

Adjusted EBITDA was -$3.18M which hugely beat analysts’ estimates of -$32.75M

Zillow has been a volatile stock in the past year. Last August, the price almost broke $50/share before a guidance cut caused the stock to crash down to below $30/share in October. It has since then roared back to its previous highs, currently trading at over $55/share.

Zillow Is Trying To Redefine The Real Estate Industry

Zillow started as a media company built by a few ex-Microsoft executives. Zillow did not make a big push into real estate until its landmark deal with Yahoo! in 2011 that really got the company to expand into this space. Since then Zillow has become the go-to place for people who want to find out how much their house might be worth. Zillow also serves as a marketplace for buyers and sellers to get together. One can think of Zillow as sort of the “eBay for real estate”. The website makes it easy to compare home prices by giving the customer a direct estimate of the home’s value called a “Zestimate”.

However, just building a marketplace would not be enough to differentiate Zillow from the competition. This is why the company has been expanding their range of services by launching products such as Zillow Mortgages where Zillow would be the actual originator of the loan, effectively making Zillow more of a finance company.

House-Flipping On A Mass Scale

Back in 2018, Zillow also launched Zillow Instant Offers, where the company would make an offer to buy the home from the seller. Although the offer might be much lower than what the market price would be, a seller desperate for a quick sale might be inclined to take the offer since it is so convenient and easy. Zillow would then resell it at a potentially higher value, effectively entering into the “house-flipping” business as well.

Although it sounds great on paper, investors did not love the idea and sold off the stock en-mass the day Instant Offers was announced. The main problem is that history has proven house-flipping to be an incredibly hard business to scale. House-flipping involves tying up huge amount of cash which burns for everyday the house is being renovated or listed but not sold. Many clever house sellers also simply just use Instant Offers as a baseline to try and negotiate a higher price elsewhere and have no intention of actually taking up the offer from Zillow.

So far, it seems like Zillow has been relatively successful at this business and if anyone can achieve scale on the house-flipping business model it would be Zillow. However, the success of this endeavor is highly dependent on the real estate market going up continuously so that they can get higher and higher prices and churn through houses continuously. If and when a recession occurs, and if the real estate market crashes like it did in 2008-2009, then Zillow will be in big trouble since they will have to hold onto a vast portfolio of real estate that will not be able to be sold or sold at a massive loss.

What’s Next For Zillow?

The volatility in the stock has really been due to the uncertainty and risk involved in many of these new ventures that Zillow is trying to push into. Investors are worried that in Zillow’s quest for world domination in the real estate market, it has wandered too far away from its core business which is still advertising. It will be a risky bet to hold Zillow stock for the near future, and if you’re the cautious type, you may want to sit on the side to see how all these business ventures play out before considering jumping in.



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