Popular-as-Sex Zillow Group Is Floating On a Speculative Bubble

Stock Market

The housing bubble of the last year has made Zillow Group (NASDAQ:Z) co-founders Rich Barton and Lloyd Frink into billionaires. However, after peaking at nearly $198 per share in February, however, Z stock is making speculators poorer.

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The way things are going, Zillow stock will end April below $133 a share, taking the market capitalization just below $34 billion on 2020 revenue of $3.34 billion.

I am wary of companies selling for 10 times sales, even with a 22% growth rate. Zillow next reports earnings May 4. Analysts expect 24 cents a share of net income on $1.1 billion of revenue. Hitting the numbers would mean growth is accelerating and profits are finally arriving.

Is it time for you to get on board?

Ads vs. Flipping

When I looked at Zillow in 2019 I noted how the company was changing from an ad-based model into a real estate investment play.

Zillow Offers, which buys homes based on the company’s “Zestimates” of their value, has since turbocharged growth. Revenue in 2018 was $1.33 billion. In 2019 it was $2.74 billion. In 2020 it was $3.4 billion. To make it happen Zillow took on debt, $1.6 billion at the end of 2020, against $699 million in 2018.

But as Zillow itself has reported, the housing market is on fire. The joke has become real. Stalking house prices is as popular as sex — America is aging, after all.

Barton even has a buzzword to describe what’s happening. He calls it the “great reshuffling.” Real estate prices are zooming thanks to high supply and low demand. But Zillow is benefitting most from this as a player, not a newspaper.

Rising Leverage

Analysts seem to have awakened to how leveraged Zillow now is to rising home prices. Of five analysts following the stock as tracked by TipRanks, only one is telling you to buy it. This is true even through their average target price is 39% higher than the stock’s current price. It tells me their confidence in that target is wavering.

Our Faisal Humayan recently profiled Zillow as one of “7 stocks to sell for May.” He noted that it had earnings before income taxes, depreciation and amortization (EBITDA) of $556 million last year, while the home buying segment had a $242 million EBITDA loss.

If anything, Zillow is becoming more leveraged to being a player in the real estate game. It bought ShowingTime, which automates the process of showing homes, for $500 million. It opened Zillow Homes, a traditional real estate brokerage business, in September.

Rising Competition

Business abhors a vacuum. Real estate is no exception.

CoStar Group (NASDAQ:CSGP), which had been focused on commercial real estate, with a market cap even equal to Zillow’s, has bought Homes.Com. It has also bought Homesnap, a marketing platform for real estate agents. It already owned Apartments.Com and RentPath, which list rental property.

The last time Zillow faced this kind of competition, they bought it, acquiring Trulia in 2015.

CoStar is too big to buy.

The Bottom Line

I can’t tell you when the current real estate bubble will burst.

The last major break came in the 1970s, when rising oil prices sent mortgage rates into the teens. Inflation and interest rates are rising today. But I’d have more concern over changing demographics. The number of people starting families is dropping.

Even a small hiccup in the market could hit Zillow hard. Zillow Offers and Zillow Homes mean it’s highly leveraged to rising prices. Then there’s the new competition from CoStar, much stiffer than that from News Corp’s (NASDAQ:NWS) Realtor.com.

I wouldn’t buy Zillow for 10 times revenue. The recent downturn was fully justified.

At the time of publication, Dana Blankenhorn directly owned no shares, directly or indirectly, in any company mentioned in this article.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack newsletter.

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