By Therese Poletti, MarketWatch
Zillow Group Inc. believes “Uberized” consumers want to instantly buy and sell homes on their phones, so it is making an even bigger bet on real-estate buying despite projections that carry a lot of risk.
On Thursday, Zillow /zigman2/quotes/205077794/composite ZG +0.10% said as part of its fourth-quarter results that it would be making more investments in its Zillow Offers service, which lets consumers easily sell their homes to the Seattle-based company. Zillow, which has seen its stock gradually lose nearly half its value since it launched the service in the second quarter of 2018, also announced a shuffling of jobs among its three co-founders, with CEO Spencer Rascoff stepping down and joining the board, replaced by co-founder Rich Barton.
Shares of Zillow initially tumbled in after-hours trading on the news, but after company executives predicted that Zillow Offers could add “$20 billion in annual revenue over the next three to five years” on a conference call with investors, its shares bounced back and jumped about 6%. Shares continued that trajectory Friday morning, opening more than 8% higher and then spiking to gains of more than 20% in morning trading as short-seller Citron Research tweeted positively on the stock . If those gains hold, it would be the best trading day in Zillow’s history: The previous top single-day percentage gain was a 15.3% advance on July 24, 2014.
Zillow likened its big shift in strategy to Netflix’s embrace of streaming video, when years ago it predicted streaming would eventually surpass its DVD rental business in revenue. Another comparison that could be made is that real estate, like content, can be very expensive in some markets.
“I see lots of parallels here as we take Zillow Group into the next phase with what we saw at Netflix, when we moved from DVDs by mail to streaming and then to originals,” Barton told analysts on the conference call. “It’s that kind of change.” Barton has been on Netflix Inc.’s /zigman2/quotes/202353025/composite NFLX -0.26% board since 2002. At the end of the call, he made another Netflix analogy. “Can you imagine if Netflix just ignored streaming? You can probably tell I’m excited. I hope you are too.”
Zillow Offers, which launched officially in April 2018 , lets homeowners who want to sell their property receive an offer from Zillow with an analysis of their home’s value. Zillow seeks to buy, renovate and then resell the properties in 90 days or less. Zillow said as part of its long-term goals, it believes it can purchase 5,000 homes a month, originate more than 3,000 loans a month, and achieve annual segment revenue of $2 billion, more than doubling its size.
But so far, it is not achieving its 90-day sales goals. Zillow said that in total, it has purchased 686 homes since Zillow Offers launched, but only sold 177, with 141 of those sales coming in the fourth quarter. Zillow Offers is available in seven markets nationwide, with plans to be in 14 by year’s end.
Those projections are not risk-free, and the U.S. real-estate market, while strong in recent years, is infamously fickle. And its moves are hardly seriously profitable, so far at least. Forbes did a quick analysis and concluded that of the 141 homes Zillow sold in the fourth quarter, it only made an average profit of $1,723 per home, after factoring in buying, selling and renovating costs. It also has other competitors, notably rival Redfin Corp. /zigman2/quotes/203726414/composite RDFN +3.72% /zigman2/quotes/203726414/composite RDFN +3.72% /zigman2/quotes/203726414/composite RDFN +3.72% with Redfin Now .
Zillow’s move to buying and selling real estate initially caused concern among its core revenue base — real-estate agents, which is where it gets about 70% of its revenue. Zillow said that it is now making real-estate agents core partners in the process.
Ygal Arounian, a Wedbush Securities analyst, said in an earnings preview note that while he “like[s] the story that Zillow is putting together as its next leg of a real-estate disrupter,” he noted that “Zillow is still in early stages of this process and the risk/reward headed into 2019 is currently balanced.”
Another risk is the amount of debt that Zillow may have to pile on to complete its ambitions. The company said that it now has $1 billion of maximum borrowing capacity to support the rapid growth of Zillow Offers in 2019 and beyond.
Investors may be excited about Zillow’s big pivot for the moment, but whether it has the capabilities to become a real-estate investor and flipper of consumer properties is a question mark that is going to hang over the stock until it proves otherwise.