Zillow (ZG) Feeling Right At Home With Speedy Wind-Down Of House Flipping Business
12:38 am Saturday, December 04th, 2021
Already mired in a steady downtrend, shares of Zillow (NASDAQ:ZG) have been under siege since the company reported weak Q3 results on November 3, while also announcing an abrupt end to its Zillow Offers business. This home flipping business quickly soured on ZG due to housing price volatility and labor shortages, limiting its ability to profitably sell houses, and causing its Homes segment to badly miss revenue expectations. Adding to the issue, there has been uncertainty regarding how quickly ZG can dwindle down its home inventory portfolio, which requires ongoing maintenance, debt, insurance, taxes, and other costs. Today, however, ZG provided some much-needed positive news, announcing that it has made significant progress in its wind-down efforts, prompting it to authorize a new $750 mln share repurchase program.
Specifically, the company says that it has sold, is under contract to sell, or has reached agreement on disposition terms for more than 50% of the homes it expects to resell during the entire wind-down process. Investors are breathing a sigh of relief at the speed of disposal, which also allows ZG to bump up its Q4 Homes segment revenue guidance to $2.3-$2.9 bln from $1.7-$2.1 bln. Furthermore, ZG continues to expect the net impact of the wind-down process to be at least cash flow neutral, even after it repays $2.9 bln in debt taken out by Zillow Offers.
At this point, it’s fair to say that ZG bit off more than it can chew with its entrance into the home flipping space. Given how hot the real estate market has been, it’s easy to understand the draw to that business, but home flipping at scale is probably not a viable model. Although the company’s management team has taken plenty of lumps for this misstep, some credit is due for admitting defeat and deciding to return ZG back to its roots. One key takeaway from today’s news is that this ZG is closing the chapter on this endeavor quicker than anticipated, enabling it to move on to other opportunities.
On that note, the exit from Zillow Offers is freeing up capital that can be used to enhance its platform, or, for shareholder-friendly purposes, such as its stock buyback program. The company will now focus on its more traditional business of generating revenue through marketing and advertising services for real estate agents and companies. To entice more agents to its platform, ZG is planning to further enhance its platform by adding immersive 3D features for home listings with digital floor plans, and improving the process of scheduling a tour. These aren’t necessarily game-changing initiatives, but we believe it puts ZG back on the right track.
With the exit from the home flipping business, some may wonder where ZG’s next major growth catalyst will come from. There is still ample room to gain market share in an industry that’s still dominated by traditional real estate agencies like RE/MAX (RMAX), Coldwell Banker, Keller Williams, and many others. Whether that opportunity is enough to satiate growth-hungry investors remains to be seen. Ultimately, though, the decision to ditch the home flipping business was the right one and is less painful than originally thought, putting ZG one step closer to turning the page on this rough stretch.
