Shares of Zillow Group Inc. /zigman2/quotes/205077794/composite ZG +3.76% lost a quarter of their value Wednesday after the internet real estate company reported third-quarter results that missed analyst expectations and said future earnings would be softer than expected . But even as Wall Street analysts slashed their forecasts and ratings, housing industry participants think the company is executing on a challenging – and lucrative – pivot.
Zillow had a net loss of nearly half a million dollars in the third quarter, compared to a profit of $9.2 million a year ago, on revenues of $343 million – a 22% increase compared to the third quarter of 2017. The revenue result met the consensus forecast, but the details concerned many stock analysts.
About two-third of Zillow’s business comes from what it calls its “Premier Agent” program, the practice by which Zillow attracts millions of house-hunters to see homes for sale. Those would-be buyers are usually looking to be matched with a real estate agent who can help with the buying process. Premier Agent revenue was down 5% compared to the second quarter, although it was 18% higher than a year ago.
Earlier coverage: Zillow advertising under CFPB fire sets real estate industry on edge
Zillow said its miss in the quarter was because it had “prioritized quality of leads over quantity,” meaning that it had switched to a new process of sharing fewer, but more motivated, potential clients with its agents. “Regardless of lead quality, though, many agents tell us that they also value a higher quantity of leads,” the company added. Real-estate agents pushed back and many advertisers pulled out during the quarter.
The company will transition back to offering agents both what it calls greater quantity of leads, and CEO Spencer Rascoff on a Tuesday earnings call said Zillow expects churn in the Premier Agent program to return to “normal levels” early in 2019.
As Wedbush analysts put it in a note out Wednesday, “While some of the pressure may be near-term in nature as agents cycle through the lead generation changes and Zillow iterates to create a better offering, when coupled with a slowing housing market and cyclically sensitive new businesses leads us to be increasingly cautious on the near-term transition.”
They slashed their 12-month price target to $30 from $45 – a price that implies no change from Wednesday trading levels.
John Campbell, a Stephens analyst who’s been among the most bullish on the company, late on Tuesday said he remained overweight the stock, but was in the process of reviewing his price target, while Stifel analysts maintained a hold rating and cut their price target to $34 from $40.
Mike DelPrete, a Colorado-based independent real estate tech adviser, believes Wall Street is missing the forest for the trees when it comes to Zillow. The company’s other main business line, Homes, accounted for just $11 million during the quarter, but punches well above its weight and carries significant long-term disruption potential, DelPrete believes.
Homes is Zillow’s department name for Zillow Offers, the process by which homeowners ask the company to buy their property. Zillow is relatively new to this business, which is often called “ibuying.” In the third quarter, the company bought 168 homes and sold 36.
By contrast, pure-play ibuyers like Opendoor have a significant headstart, are ensconced in many more markets, and have far more market share where they operate. During the past quarter, for example, Opendoor acquired about 4,000 homes and sold about that many, a company spokesperson told MarketWatch.
But as DelPrete puts it, “If you’re thinking about Zillow doing ibuying and you’re not thinking about seller leads, you’re thinking about it the wrong way.”
In the last quarter, though Zillow’s actual transaction level was low, 20,000 people requested an offer. “That means there’s thousands of people whose house they didn’t make an offer on but they’re interested in selling,” DelPrete said. “That’s a highly-qualified seller lead that they can give to agents” in return for a referral fee.
On the 20,000 people who requested an Instant Offer in the quarter, DelPrete said, “that’s a $20 million opportunity right there. That goes right to the bottom line, compared to the money they make flipping houses,” which he estimates is a 1% to 2% net profit. “To me that crystallizes the opportunity. That’s a billion dollar opportunity if they roll out nationally.”
On the earnings call Tuesday, Rascoff told analysts that 45% of people who request a Zillow Offer do wind up listing their home for sale.
For Rick Sharga, a lending industry veteran now at Carrington Mortgage Holdings, what’s more interesting is how Zillow is positioning itself as an industry leader at every step of the housing lifecycle for many Americans. The company took in $18.4 million in rental-related revenues in the quarter, for example, up 31% compared to a year ago. At some point renters may want to become homeowners, and Sharga thinks a company with Zillow’s big-data reach is in a great position to determine when that could happen, and offer services to help. In the same way, homeowners who have been living in their homes a long time may be good candidates to sell in order to move up or move down.
Zillow is also making a bigger attempt to jump into mortgage lending, although that revenue was down 12% compared to a year ago thanks in part to a slower market as well as a transition to a new platform.
Sharga sees Zillow as positioning itself well at every stage of the housing “ecosystem.”
“I’d never bet against Spencer,” he said.