Zillow Group beat estimates for its first quarter revenue and profit but unpredictable housing market trends are raising concern for some analysts as the company refocuses its business following the shutdown of Zillow Offers.
The Seattle online real estate giant posted $4.3 billion in Q1 revenue, beating expectations of $3.4 billion, and earnings per share of $0.56, which also topped estimates. Shares were up 4% in after-hours trading but quickly fell more than 8%.
Zillow said it is selling houses faster than anticipated as part of the shutdown of Zillow Offers, which helped drive top-line results in Q1.
Zillow announced last year that it would end the company’s ambitious “iBuying” home-buying arm. Zillow took a $405 million write-down and slashed 25% of its workforce related to the decision.
Bloomberg Businessweek on Thursday published a feature about the “disastrous” move to enter home-buying, “attempting to pivot from selling online advertising to operating what amounted to a hedge fund and a sprawling construction business, two fields in which it had no experience at all.”
In a letter to shareholders, Zillow CEO Rich Barton said the company has “meaningfully de-risked the business” and described the balance sheet as “ironclad.” Zillow has $3.6 billion in cash, up $500 million from the previous quarter.
Earlier this year Barton laid out a new strategy centered around what Zillow calls the “housing super app,” described as a digital experience that “connects all the fragmented pieces of the moving process and brings them together on one transaction.”
In the new shareholders letter (which you can read in full below) Barton identified five growth pillars for the company: “touring, financing, seller services, enhancing our partner network, and integrating our services.”
The idea is to use Zillow’s brand and traffic to generate more revenue off housing-related transactions. Average monthly unique users was 211 million in Q1, down 5% year-over-year; overall visits hit 2.6 billion, a 5% increase.
In some ways, Zillow is building around Premier Agent, its traditional business of selling advertising to real estate agents. Premier Agent revenue grew 9% year-over-year to $363 million in the first quarter.
But rising mortgage rates and lack of supply could slow home sales and spell trouble for online real estate companies. A recent survey from analysts at RBC Capital Markets indicated that a majority of agents will cut or eliminate ad spend with Zillow. RBC this week lowered its 12-month price target estimates.
“ZG’s dominant audience share remains our north star but cycle fears will likely continue to impede stock performance for the next several quarters, in our view,” RBC wrote in a report last month.
Barton noted “lower year-over-year growth in new for-sale listings and existing home sales” impacting Q2 revenue projections for Premier Agent.
The macro environment might also affect Zillow’s mortgage business, which saw revenue fall 32% to $46 million.
Analysts at Wedbush this week lowered outlook for Zillow, Redfin, and Opendoor, all which have seen stock prices fall substantially this year.
“While we remain constructive on technology disruption in residential real estate and view the key disrupters as the future leaders of the industry, in the near term it is difficult to see what gets this group working while in the kind of rising rate environment we are in right now,” Wedbush said in a report.
Since the Zillow Offers announcement in November, Zillow’s stock has lost more than half its value, trading Thursday below $40/share. It reached a record-high of more than $200/share in February 2021.
Read the full shareholders letter below:
In these volatile times, we are especially proud of our company and brand — one that helps people find their home, a place of comfort and safety. We are energized about the opportunity in front of us and are firmly focused on our strategic vision of building the housing super app for a mass market of movers.
With forecasts varying widely, one thing that is clear about the 2022 housing market is that the path ahead is uncertain. Inventory levels remain low, new for-sale listings remain down year over year, and our average page views per listing were at record highs in Q1, demonstrating the ongoing supply-demand imbalance. These dynamics are driving home values up in spite of rising interest rates, which is impacting affordability. While it’s clear people still have a strong interest in moving, total consumer transaction value growth trends are softening and experts have disparate views of what will happen next.
While we are impacted by the housing market, we delivered Q1 results within or above our outlook. Our position as a leader at the top of the funnel stands firm, with 2.6 billion visits in Q1 and 38% unique user growth in Rentals year over year. Our cash position and cash-flow generation are also strong, with $3.6 billion in cash and investments, $500 million more than the previous quarter, including the impact of $348 million in share repurchases during Q1.
We believe our cash position, coupled with a strong core business model, enables us to return excess capital originally built up for a capital-intensive business. It’s comforting to be well-positioned for foul weather that may come, and to have the flexibility to innovate on attractive growth opportunities for the long term.
We have re-oriented the company around our housing super app vision, generated strong cash flows, and outperformed our expectations for the wind-down of our iBuying operations. Our faster-than-expected resales of homes in inventory and better-than-expected cash flow from the wind-down allowed us to pay off all iBuying-related asset-backed debt on our balance sheet at the end of April, earlier than we anticipated.
As we work toward our 2025 targets of $5 billion in consolidated revenue and 45% consolidated Adjusted EBITDA margin, we are focusing on delivering innovations in five key growth pillars: touring, financing, seller services, enhancing our partner network, and integrating our services. And we’re starting to see traction in these efforts:
● We’ve made key improvements in virtual touring. Our new 3D Home Tour technology allows customers to travel through a home as if they were touring it in person by contextualizing all the disjointed information — photos, floor plans, spatial perspective — into one seamless digital experience.
● We’re innovating on the in-person tour experience, too. We enabled ShowingTime’s Real Time Availability in several markets — a tool that exposes availability of home tour times for all agents using ShowingTime’s platform. This is one of the first key actions in our integration plan to make scheduling a home tour easier than it is today.
● We are upgrading the tech experience for StreetEasy customers in NYC. To cater to the way New Yorkers apartment hunt and their desire for on-demand experiences in every area of their lives, we are planning to launch StreetScape, a new feature that uses augmented reality to place StreetEasy’s comprehensive data and listings into a home shopper’s real physical space on the streets of the city.
Our evolved strategy has an elevated focus on our “mid-funnel” efforts as we look for opportunities to increase engagement, transactions, and revenue per transaction from where we are today. Our strategy and 2025 targets, which we shared last quarter, are grounded in the enormous opportunity in the U.S. housing market.
We see a great deal of opportunity in front of us, but we also recognize we control the levers of our investment spend. We have meaningfully de-risked the business and are moving forward with an ironclad balance sheet, a healthy cash-flow-generative core business, and the industry-leading brand and audience. This gives us the confidence to navigate the short term, with our eyes up on our long-term growth opportunity.
Rich Barton, Co-founder & CEO
Allen Parker, CFO