Shares of Zillow Inc. (NASDAQ: Z) fell by as much as 16% in after-hours trading on Wednesday after the company issued disappointing guidance for its home-flipping business. Zillow’s losses in the second quarter were slimmer than expected, which caused the stock to rise initially. The rally didn’t last long as investors dissected the quarterly financials.

 

Q2 Earnings Summary

  • Earnings: -$0.35 per share
  • Revenue: $599.6 million
Zillow’s third-quarter earnings outlook deteriorated because of its home-flipping business.

The online real-estate marketplace posted a net loss of $0.35 per share on revenue of $599.6 million in the second quarter, exceeding forecasts on both fronts. Analysts in a FactSet survey expected a loss of $0.38 per share on sales of $585 million.

In the second quarter of last year, Zillow lost $0.02 per share on revenue of $325 million. Compared annually, sales increased by 84.5%.

Zillow Offers, a home-flipping platform for “homeowners who want a certain and predictable sale on their timeline,” generated $249 million in revenue during the quarter. The company also said it received requests from 70,000 people who wanted to sell their homes to Zillow.

All said, the company bought 1,535 homes and sold 768 homes in the second quarter.

Despite posting these numbers, Zillow’s third-quarter earnings outlook deteriorated because of its home-flipping business. In Q3, the company expects its home-flipping segment to lose as much as $80 million before interest, taxes, depreciation, and amortization.

As a result, Zillow expects third-quarter EBITDA to range from a loss of $18 million and a gain of $2 million. The median estimate was for a gain of $17 million.

 

Zillow Stock Tanks After Hours

Zillow’s stock plunged in after-hours trading as markets dissected the quarterly earnings call. At the time of writing, the share price was down 14.6% at $42.50.

Zillow Share Price YTD - Aug 8 2019

Source: Yahoo Finance

The stock ended regular New York trading up 0.4% at $49.75. At that level, Zillow had a total market capitalization of $10.6 billion. If after-hours trading is any indication, the market-cap figure will go down a few pegs on Thursday.

In terms of gains, Zillow has far outpaced the broader stock market this year, having gained a whopping 64% through Wednesday’s close. The rally began at the start of May when the company was valued around $32 a share. A positive first-quarter earnings report that saw revenue increase 51% year-over-year was largely responsible for the rally.

 

Conclusion

Clearly, Zillow is moving beyond its original business of home listing and marketing. The company is expanding on multiple fronts and is beginning to target institutional investors. Despite posting solid revenue growth, growing competition in the real estate market could pose a problem. Nevertheless, Zillow says it expects to buy 5,000 homes per month by 2022, which is significantly higher than its current volume.

 

Disclaimer: Author holds no investment position in Zillow.