Zillow Is Rallying on Plans to Sell Homes. Does That Make Z Stock a Buy?

It’s already been a big day for investors of a certain digital real estate company. Indeed, shares of Zillow Group (NASDAQ:Z) are up by 7% after the platform reported that it had sold, or is in the process of selling, more than 50% of the homes it had purchased earlier this year. The company also announced its intent to repurchase $750 million of Z stock using cash reserves from its now defunct Offers business.

The Zillow logo displayed on a web browser and magnified by a magnifying glass
Source: II.studio / Shutterstock.com

So, why else is Z stock up today?

Zillow’s management reported that it now expects revenue of $2.3 billion to $2.9 billion for its home-buying business during the fourth quarter. This is a significant guidance raise. Previously, management stated that they expected revenue of $1.7 billion to $2.1 billion.

Investors are certainly happy about this news after it was announced in October that Zillow would be ending its Offers home-buying business and laying off a quarter of it staff. The company pinpointed labor shortages and supply chain issues as the culprit for ending Offers.

During the third quarter, Zillow bought roughly 10,000 homes that were projected to sell at a loss. As a result, Zillow announced in November that it would write down the inventory of its homes by as much as $569 million. The negative sentiment of investors was reflected in Z stock’s November performance, as the company declined by a massive 44%.

Z Stock Does a 180 After Good Numbers, Stock Buyback Announcement

However, the recent news that Zillow is catching up on its backlog and winding down Offers seems to have turned the stock’s trajectory around. The guidance raise certainly didn’t hurt, either.

Additionally, Zillow CEO Rich Barton commented on the intention to buy back Z stock:

“We are pleased with the progress of our wind-down efforts and recognize that no longer operating Zillow Offers will allow us to have a more capital-efficient balance sheet and business moving forward. With that, we see today as an opportune time to announce a share repurchase program and reduce the cash balance we built up to support Zillow Offers.”

Consequently, investors are left wondering what’s next for Z stock and if this upward momentum can last.

Sure, it certainly seems that Zillow dodged a bullet with its latest announcement. However, with median sale prices of houses sold in the U.S. near an all-time high, investors are left with a dilemma. Zillow’s business model capitalizes on advertisements on its platform, collecting fees for leads and charging interest for home loans. Potential buyers may feel discouraged by high prices and delay their home-buying plans. This could bring down traffic on Zillow’s online platform, which would directly affect ad revenue.

Therefore, investors in Z stock should keep a steady eye on median sale prices and Zillow’s web traffic. This will help gauge interest in home-buying as the year wraps up.

On the date of publication, Eddie Pan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Article printed from InvestorPlace Media, https://investorplace.com/2021/12/zillow-is-rallying-on-plans-to-sell-homes-does-that-make-z-stock-a-buy/.

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