Tough Transition Leads To an Opportunity with Zillow Group

Seattle-based Zillow Group (NASDAQ:ZG) is known as a popular online real estate marketplace. Thus, if you’re bullish on virtual house tours and app-facilitated home buying, ZG stock should be right up your alley.

zillow app icon on a mobile phone
Source: OpturaDesign /

However, that’s not all there is to the story. Around three and a half years ago, Zillow Group announced a new venture into actually buying properties.

That venture didn’t work out too well. Earlier this year, Zillow Group abruptly announced the termination of its home-buying foray, while disclosing sizable losses from the failed experiment.

But as I like to say, just because you’ve failed, this doesn’t make you a failure. It’s entirely possible that investors have overreacted and swung the pendulum too far to the bearish side, thereby providing a rare bargain-hunting opportunity with Zillow Group.

A Closer Look at ZG Stock

Just for clarity’s sake, Zillow (NASDAQ:Z) is the Class C version of the stock, while ZG/Zillow Group is the Class A version.

So, don’t be surprised if people use the company names Zillow and Zillow Group interchangeably. For most practical purposes, they’re basically the same thing.

In any case, it’s fair to say that Zillow Group’s shareholders enjoyed a spectacular run in 2020.

From $26 in March of that year to $142 by the end of 2020, ZG stock’s rally reflected the market’s increasingly optimistic stance on the U.S. real estate market.

It also seems that Zillow Group benefited from the onset of the Covid-19 pandemic. That’s because Wall Street generally leaned bullish on businesses with online platforms.

The momentum accelerated into early 2021, as ZG stock topped out at $212.40 in February. After that, it was pretty much all downhill.

By the middle of December, the Zillow Group share price had sunk to $58. In other words, you’ve been given an opportunity to invest in the company at pre-Covid-19 and pre-real-estate-boom prices.

Why Zillow Group Failed

So, what the heck happened? Why didn’t Zillow Group succeed with its home-buying strategy?

According to the company, its ability to predict the future was lacking:

“When we decided to take a big swing on Zillow Offers three and a half years ago, our aim was to become a market maker, not a market risk taker, underpinned by the need to forecast the price of homes accurately three to six months into the future.”

As someone who attempts to prognosticate asset prices on a regular basis, I can fully attest to the difficulty of predicting any market’s future course.

Therefore, I fully respect and understand Zillow Group’s abandonment of Zillow Offers. Really, the company shouldn’t have ventured outside of its wheelhouse in the first place.

Thankfully, in Zillow Group’s words, the company still has a “strong and growing core marketplace business from which to invest moving forward.”

This, then, leads us to the question of how the company is doing financially, and how Zillow Group intends to pick up the proverbial pieces.

Big Share Buyback Program

In the company’s third-quarter 2021 financial report, there are data points indicating that Zillow Group, while far from a perfect business, isn’t a complete train wreck.

For instance, Zillow Group’s IMT (Internet, Media, and Technology) segment revenues grew 16% year-over-year (YoY). Also, the company’s Mortgages segment revenues increased YoY by 30% – not too shabby.

Not only that, but Zillow Group ended the third quarter with cash and investments of $3.2 billion. Hence, the company actually had a decent capital position.

Additionally, Zillow Group co-founder and CEO Rich Barton provided clues regarding his company’s transition back to its simpler business model.

Specifically, Barton announced Zillow Group’s share repurchase program. He also emphasized his company’s intention to “reduce the cash balance we built up to support Zillow Offers.”

Concerning the share buyback program, it allows for repurchases of up to $750 million of the Company’s Class A common stock, Class C capital stock or a combination of both.

Plus, Zillow Group updated its fourth-quarter 2021 Homes segment revenue outlook from a range of $1.7 billion to $2.1 billion, to a range of $2.3 billion to $2.9 billion.

The Bottom Line

All in all, Zillow Group doesn’t appear to be the absolute train wreck that some folks might think it is.

With a firm capital position and big-time share buybacks coming, there’s a solid bull case in favor of Zillow Group.

Just maybe, ZG stock is actually a bargain instead of a falling knife. Zillow Group, therefore, isn’t necessarily a failure just because the company tried something new and failed at it.

On the date of publication, David Moadel 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 Publishing Guidelines.

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