Zillow has been a market darling in its niche, but momentum has turned negative this summer. The shares have shed a quarter of their value since peaking in June. Let's go over a few of the reasons why last week's report sent many Zillow investors scrambling out of this once scintillating stock.
1. A miss is a miss
Revenue rose 22% to hit $325.2 million, but it fell short of the $325.8 million that analysts were targeting. Zillow's guidance for the quarter was calling for $322 million to $327 million back in May, so landing just above the midpoint of its official forecast isn't technically a miss.
Adjusted EBITDA also landed above the high end of its earlier range, as a larger than expected deficit on its nascent Zillow Offers home-flipping business was more than offset by its better than expected gain everywhere else. However, for a company that routinely smokes Wall Street pro targets, proving mortal isn't good enough.
2. Decelerating revenue growth can be a bear
Zillow's top-line growth has now clocked in lower for the sixth consecutive quarter. It was a photo finish, as the second quarter's 21.9% rise follows a 22% uptick three months earlier. A streak is still a streak.
Guidance initiated for the third quarter suggests that the deceleration will continue. Zillow sees revenue growing just shy of 20% in the current quarter, and that includes the first period of revenue recognition from Zillow Offers.
3. Hunting down home hunters hits home
One of the more shocking nuggets in Zillow's report is that the average monthly unique visitors across its real estate websites rose just 4% since the prior year. Most of that modest gain happened in April, another grim nod for the way that traffic is trending heading into this summer.
The silver lining to the 4% increase in unique visitors is that website visits rose 14%, so users are spending more time on the sites. However, with Premier Agent revenue up 22% one has to wonder if real estate professionals as a whole will continue to pay more than Zillow's popularity as a platform.
4. Higher mortgage rates can be problematic
The one business segment that actually declined during the second quarter was mortgage-related revenue. Interest rates are inching higher, and that's eating into the refinancing business.
Zillow has been somewhat immune to market downturns in the past. Real estate market lulls often prompt serious real estate pros to Zillow to stand out in a more desperate market for leads. However, with rates on the rise one has to wonder if real estate prices and demand will suffer as prospective homebuyers get less bang for their mortgaged buck. This also may not be the best lending rate climate to be flipping homes.
5. Hosing down guidance is never a good look
Zillow is lowering its revenue outlook for all of 2018. The biggest reason for the downward revision is Zillow scaling back its expectations for Zillow Offers for the balance of the year, but it also adjusted its forecast for its flagship portal business lower.
Expectations are high for Zillow, so when it falls short on some fronts it can be painful for investors. Zillow fell short on more than just some fronts.
Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool has a disclosure policy.