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Zillow (NASDAQ: ZG) investors have had their fair share of volatility and cause for concern in recent months. Is hope on the horizon? In this clip from “Real Talk” on Motley Fool Live, recorded on Feb. 11, Motley Fool contributors Matt Frankel and Jason Hall discuss Zillow’s financials in the aftermath of pulling the plug on its iBuying business and analyze where its stock might be headed.
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Matt Frankel: Zillow is up by 18% last I looked. I think it’s still holding pretty well around there but it’s having a great day. At first glance, you might not understand why because if you look, a $528 million loss for the full-year, $261 million which happened in the fourth quarter alone. If you remember, this is Zillow’s first quarter since announcing it’s getting out of the iBuying business. We’ll get to some of the details of Zillow’s business as we chat. But, the big story is that the wind-down of the iBuying business is not only proceeding faster than expected, but the economics are better than expected. Zillow’s losing less money than they had feared. Zillow expected to sell about 5,000 homes in the fourth quarter out of about 18,000 on its balance sheet. It sold almost 8,400 homes in the fourth quarter, so way above expectations. It still has about 10,000 left. CEO Rich Barton said that it’s adding better unit economics than expected. Jason, first, we’ll start with that part of the earnings report. What do you make of the iBuying wind-down?
Jason Hall: Here’s the bottom line. I was looking before the show, just prepping to get familiar with the latest data. If there was ever a time to decide, we’re going to get out of this business, you do it when there’s 920,000 homes available for sale in the United States. It’s like historic low levels and that’s helping. I wonder also, Matt, the fact that interest rates are going to start going up here relatively soon and maybe there’s a little bit of acceleration there in potential buyers that are buying that inventory now because they want to try to get things on the market quicker and get their inventory lined up before rates start going up and puts downward pressure on selling prices of houses.
Frankel: Not only that, but higher interest rates would raise Zillow’s carrying costs on 18,000 homes. iBuying was 85% of their revenue for the quarter. The revenue number really isn’t that meaningful all by itself. You can say it’s overhead. I think it was $3.3 billion of revenue. Doesn’t really tell the story about the business, especially for long-term investors. Their core businesses, what they call the IMT segment, stands for internet, media, and technology, if I have that correct. That revenue was just under half a billion dollars for the quarter. So, about $2 billion in annualized revenue from that side of the business. That’s their surge functions. That’s their Premier Agent business, which is the big one. That’s their commission they get from their mortgage partners and things like that. Everything about iBuying, is essentially in the IMT segment. There you go.
Hall: Yeah, $2.2 billion last year.
Frankel: Unlike the iBuying, this is a small revenue stream relatively. You’re not talking about billions of dollars a quarter, but it’s very high margin revenue. It’s revenue that you have the incremental cost of landing a new Premier Agent client that is almost nothing to Zillow.
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Jason Hall owns Zillow Group (A shares) and Zillow Group (C shares). Matthew Frankel, CFP® owns Zillow Group (C shares). The Motley Fool owns and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool has a disclosure policy.
