Zillow Group Stock May Have Rebounded, But It Won’t Go Up Forever

Zillow Group (NASDAQ:ZG) stock has a particular problem.

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

Zillow went from being a tech company to a house flipper and is paying the price.

ZG stock plunged by more than 10% Oct. 18 after it paused home buying to deal with the excess inventory.

ZG stock recovered about one-third of the loss over the next few days. It trades today back above $93.

Why investors were buying the dip and driving the price back up, however, is a mystery. The shares are selling for more than 18 times revenue, and 148 times earnings.

The company had $8.77 billion in housing inventory on its books at the end of June, and $1.47 billion of total debt, on a market cap of $22.5 billion.

ZG Stock and the Bubble

I warned about this earlier in the year. Writing about Zillow competitor OpenDoor Technologies (NASDAQ:OPEN), I noted that technology is supposed to fuel deflation, not inflation. I accused the companies of getting high on their own supply. 

In theory, Zillow and OpenDoor are different.

OpenDoor is supposed to automate the process of buying and selling, the intricate dance that could take up to 15% of equity each time a property is flipped.

Zillow automates marketing. It’s the cards my mom carried in three-ring binders during the 1960s, selling for Dial Realty on Long Island. Their slogan was “dial your home by computer.”

The cards came from the Multiple Listing Service, an industry operation now owned by News Corp. (NASDAQ:NWS) as Realtor.com.

The change came in 2018 when Zillow became an iBuyer. Rather than just helping consumers bypass brokers in selling their homes, Zillow started buying homes itself.

Rather than cutting costs, in other words, Zillow sought to benefit from higher prices. Now both OpenDoor and Zillow are bets on residential real estate.

This has become unaffordable under the onslaught of private equity and speculators turning homes into AirBnB (NASDAQ:ABNB) units.

It’s a classic bubble that is going to burst. Zillow, which bought 3,805 homes in the second quarter alone, may help burst it.

Zillow’s Problem

Zillow faces a problem familiar to anyone who has ever watched a Discovery (NASDAQ:DISCA) house-flipping show.

For speculators, time is money. Flipping homes takes people for closing and re-sale. These are costs Zillow and OpenDoor are meant to automate.

But people are also needed to handle the minor renovations that increase value. Zillow is having trouble getting that together. So, they’re halting the intake while they deal with the outflow.

This has not yet proven a problem for OpenDoor, whose stock spiked 10% while Zillow crashed. OpenDoor has since fallen back to its pre-spike price.

It’s also not a problem for OfferPad Solutions (NASDAQ:OPAD), launched specifically as an iBuyer. They’re down almost 30% in 2021, which should be a clue.

Analysts are now all over the map on Zillow. Revenue estimates for next year range from $6.4 billion to $11.9 billion.

Earnings estimates range from a high of $2.04 per share to a loss of $1.79. Even if it hit the top end of the range, Zillow is selling for 43 times forward earnings.

The Bottom Line

No market keeps going up forever.

The average home has doubled in price over the last 10 years. The boom has been led by speculators, who turn owner-occupied homes into rentals, depleting the available stock.

The 2017 tax cut created new breaks for these buyers, fueling the current boom. Efforts by the new Administration to scale back those benefits have failed so far.

Floating a huge industry on a political knife-edge isn’t an investment, it’s mere speculation. Even if Zillow can clear its present inventory, you’re not buying a tech company. You’re buying the Property Brothers.

I would buy the tech company. The tech company could make homebuying affordable again. The flippers have destroyed the dream. When investors realize how easily they can hurt ZG stock, this will all end in tears.

On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.

Article printed from InvestorPlace Media, https://investorplace.com/2021/10/zg-stock-may-have-rebounded-but-it-wont-go-up-forever/.

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