Summary
- Zillow is the market-leading housing platform in the U.S., which generated ~300 million website visits in January, up ~18% from December, according to SimilarWeb data.
- The company reported better-than-expected financial results for Q4, as it beat both revenue and earnings estimates.
- Zillow bought back 22 million shares for $947 million in 2022; this translates to an average share price of ~$43 per share.
Zillow (Z) is most popular real estate platform in the U.S. and has ~65% app market share. In addition, the company has outgrown their next 15 competitors over the last several quarters, according to comScore data. Zillow has faced a rough time over the past couple of years, after a disaster in its iBuying business resulted in a shutdown of that segment, as its models failed to predict housing prices. The good news is founder and CEO Rich Barton, is a technology veteran, as the founder of notable businesses such as Expedia and Glassdoor. I admire Barton's upfront style as he previously admitted Zillow "swung for the fences and missed" with regards to its iBuying business, in a 2022 earnings call. Moving forward Zillow still has a major opportunity to create a "Super App" and double its share of customer property transactions by 2025. In the fourth quarter of 2022, the business has made a solid start with top and bottom line estimates beat. However, there is still a long way to go and given the atrocious housing market currently, it won't be easy. In this post, I'm going to break down Zillow's Q4 earnings, the recent product improvements/progress and its valuation, using my discounted cash flow model, let's dive in.
Mixed Financials
Zillow reported improving but mixed financial results for the fourth quarter of 2022. Its Revenue was $435 million, which was down 19% year over year, despite beating analyst forecasts of $415 million ( Refinitiv data ). This overall decline was expected as the company shut down its home buying business and the housing market is in a downturn currently. The most obvious sign of this is Mortgages revenue which declined 65% year over year to $18 million. This was of course impacted by the rising interest rate environment, of which economic forecasts indicate will continue to rise from 4.75% to 5.25% in 2023. The good news is inflation [CPI] is on a downward trend with 6.4% reported for January 2023, down from the 9.1% high in June 2022. Therefore, I don't expect the Fed to keep interest rates extremely high forever (nor do they), and thus mortgage adoption should return in the future, as affordability improves.
Zillow Financials (Q4,22 report)
A positive trait of the housing market is people will always need somewhere to live. Therefore, I wasn't surprised to see a positive 13% year over year increase in rentals for Q4,22. Premier Agent revenue was also better than management expected, as it declined by 20% YoY to $283 million, versus the 31% forecast. This difference looks to have been driven by a higher concentration of first time home buyers, versus cash buyers.
Bringing everything together its IMT segment which stands for "Internet, Media and Technology' is now the core of its business and generated revenue of $417 million, which declined by 14% year over year but was above the high end of company guidance.
Zillow is still struggling with profitability and reported a net loss of negative $72 million in Q4,22. A positive is this was a substantial improve from the negative $261 million reported in Q4,21 and thus the metric is moving in the right direction.
Net Loss (Author Annotations Income statement)
Its earnings per share [EPS] of $0.21 on an adjusted basis, which beat analysts' estimates of $0.07 according to Refinitiv data .
The Road to a Housing Super App
Taking a step back its worth remembering that Zillow is still the market leader and its website traffic has actually increased by ~18% quarter over quarter in January to 300.5 million visits. Therefore, this is a positive sign that consumer demand is still there for homes and as economic conditions improve, and Zillow builds out its new features it should be able to capture a greater amount of transactions.
Website Visits (Author Similarweb data)
Zillow has previously outlined bold plans to capture 6% of customer property transactions, up from 3% in 2021. In order to accomplish this the company has outlined its four growth pillars, this includes Touring, Financing, Seller solutions and its enhanced partner network, in order to create a housing "super app".
Zillow Roadmap by 2025 (Investor presentation)
So far progress has been positive as the company acquired the online scheduling software ShowingTime in 2021 and integrated it in late 2022. This enables the real time availability of agents to be shown to customers which reduces the friction associated with booking a viewing. Upon recently reviewing this platform I also discovered new features such as the ability for agents to generate map reroutings, should a viewer cancel and send automated messages etc. According to Zillow's data, movers that request a tour convert to a transaction at three times the rate of other actions on Zillow, therefore, investing into lowering the friction of this experience makes a lot of sense. The platform is still in the early stages of a full rollout as it was rolled out with Zillow integration in Atlanta initially in the fourth quarter of 2022 and is operational across Dallas, Houston, and Denver, some of the fastest growing cities in the U.S. According to the earnings call , management noted positive signals so far with "higher connection rates" and "higher customer propensity" to work with its Premier Agent partners. Therefore, I forecast similar positivity as the platform expands across the rest of the U.S.A.
Zillow has also continued to build out its ShowingTime+ package which includes listing media services. Examples include the ability to book a professional photographer, generate interactive floor plans, drone images/video and much more. According to a Zillow cited survey, 79% of home buyers said they were more likely to view a home if the listing includes a floor plan. In my personal experience I find value in floor plans, especially if they interactively link with images, like Zillow's do. In the fourth quarter of 2022, the company acquired VRX Media, a national photographer network. The world of photographers is a fairly illiquid and inefficient market, as its one of the few jobs where you need someone local who is skilled. Therefore, I believe the acquisition of VRX Media makes a lot of sense as the company already has the photographer connections across multiple states and it was founded by former real estate agents.
Overall I see its ShowingTime+ packages as a positive service as it all helps to improve the listing for sellers, which increases the odds of sale while also enabling Zillow capture more revenue through cross selling.
ShowingTime Plus (Author Screenshot ShowingTime)
Zillow also still has the opportunity to make the most of its historic acquisition of DotLoop, which enables e-signatures for closing documents. Zillow has also been scaling out its home loans program which has grown from ~15% customer adoption n Q3,22 to ~20% by Q4,22. The mortgage direct service has achieved initial success in Raleigh, North Carolina and now the company plans to roll it out into other markets.
Zillow is also still poised to benefit from those who wish to sell a home on the platform even if the company doesn't plan to purchase the homes itself. This is because Zillow has partnered with former competitor Opendoor to offer sellers a cash offer from the company upon request, and of course Zillow can then take a cut. In February 15th 2023, the company announced an initial rollout in Atlanta and Raleigh, before expanding to other states. Again this is a hugely positive sign as helps to move Zillow closer to its goal of capturing 6% of property transaction value by 2025.
Valuation and Forecasts
In order to value Zillow I have plugged its latest financial data into my discounted cash flow valuation model. I have forecast negative 15% revenue growth for "next year", which is the full year of 2023 in my model. This is based upon an extrapolation of managements Q1,23 guidance of between $404 million and $437 million. This would result in a negative 22% decline at the midpoint for Q1, but I am forecasting better comparables and product rollout features to drive slightly less negative revenue in the latter half of the year. In years 2 to 5, I have forecast 19% revenue growth rate per year, which is fairly optimistic and based upon both an improvement/rebound in the housing market, which should boost mortgage and agent revenue. In addition, I forecast Zillow will capture a greater percentage of transactions through its ShowingTime plus platform, as it rolls out across more states and cities.
Zillow stock valuation 1 (created by author Deep Tech Insights)
To increase the accuracy of my valuation model, I have capitalized R&D expenses which has lifted net income to 1.92% in profitability for 2022 and I have extrapolated this for 2023. In years 2 to 5, I have forecast a 25% operating margin over the next 8 years. This may seem optimistic but it is only slightly above the software industry average of 23%. Given Zillow has bold plans to increase its capture of customer transactions and it now runs capital light website/software focused business, this isn't impossible.
For extra information, I have taken into account Zillow's balance sheet which has $3.4 billion in cash and short term investments. In addition, to $1.7 billion in convertible debt outstanding.
Zillow stock valuation 2 (created by author Deep Tech Insights)
Given these factors I get a fair value of $47 per share, the stock is trading at a similar level at the time of writing and thus I will label it as "fairly valued" according to my valuation model and fairly optimistic forecasts for years 2 to 5.
As an extra datapoint, Zillow trades at a price to sales ratio = 0.957x, which is ~80% cheaper than its 5 year average.
Risks
Housing Market Decline/Recession
As mentioned prior, the housing market is currently experiencing tepid demand due to the rising interest rate environment and the forecasted recession. Therefore, I forecast Zillow to be impacted negative for at least the next year as it will face headwinds.
Final Thoughts
Zillow is currently being resurrected from the ashes after its disaster with its home buying operation. However, I believe its new strategy makes sense given its capital light and fits within the circle of competence of the company's tech focused management. I am impressed with CEO Rich Barton's execution and investor communication so far, as he has made plan and starting to generate real results in record time, admitting mistakes along the way. Its partnership with former competitor Opendoor is also special in my eyes, as it shows the company doesn't have an ego and is about doing what it takes for the best of the business. Overall my valuation model indicates the stock is close to its "fair value", given the tepid housing market I will label it as a "hold" for now.
For further details see:
Zillow: Q4 Earnings Beat, But Still A Long Way To Go