In this segment from MarketFoolery, host Chris Hill is joined by Motley Fool Asset Management's Bill Barker to discuss Zillow Group's (NASDAQ:ZG) (NASDAQ:Z) latest quarterly results. It missed analysts' revenue expectations, which investors never want to hear, but revenue guidance was also weak, and that set the stock up for a serious plunge.
But the company also revealed that it was acquiring Mortgage Lenders of America, and the market lacks much faith in Zillow's ability to expand profitably into niches adjacent to its core business. Did investors overreact? Is the stock now in bargain territory?
Bill Barker is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such.
A full transcript follows the video.
This video was recorded on Aug. 7, 2018.
Chris Hill: We'll start with Zillow. I think with Zillow, you can forget the adjusted profits they reported in the second quarter. No one appears to care about that because Zillow's revenue came in lower than expected, and guidance for the full fiscal year was weak. Shares of the real estate website operator are getting smacked in a big way. Zillow down 17% this morning.
Bill Barker: The revenue guidance was very weak. Complicating matters, Zillow also announced an acquisition which also involves expanding into an additional line of the business. The market reaction is a little hard to parse, as to which part of this the market is most disgusted with. Let's just call it a fair competition between all of that -- missing on the quarter, guiding lower, and adding a new leg to the business, which didn't go over well the last time it was done, either.
Hill: That's the thing. I think the stock would be down regardless of the acquisition, but it really does seem like some analysts are going out of their way to essentially say to Zillow, "For the love of God, stop buying things. Just stop buying new businesses and trying to build out your portfolio. Get your core business right."
Barker: Maybe. The addition here is a mortgage lender from Overland Park, Kansas. Mortgage Lenders of America is the name of the acquisition. It's not that big of a company, about 300 employees. It's complementary toward the home acquisition and refurbishment and resale business that Zillow has started but has not yet translated into actual revenue. It doesn't seem to me this is wandering too far out of what their core competencies should be, but until they prove that they can make a profit on this kind of thing, the market is going to keep reacting negatively.
Hill: When you look at the stock right now, all of the sudden on a bit of a discount, the stock is on sale -- does this interest you at all? Or do you look at this and say, "No, I really want to see at least one or two quarters of revenue going in the right direction?"
Barker: It interests me. I'd want to do more work than I've done looking at this brand-new business, about which there was relatively little disclosed, i.e. the purchase price.
Hill: I was going to say, including the amount of money that they paid for Mortgage Lenders of America.
Barker: Yes, and that's the kind of thing you'd want to know to have the amount of confidence you should have in buying something. The stock price has wandered around, visited a few interesting places, but not really much improved, certainly not over the last year. As I say, I think the business construction of getting into being a buyer and a seller and a mortgagor makes sense, given their data. But it makes the business a lot more asset-heavy. There aren't too many assets heavier than a home.
Barker: Before, it was a website, which is very asset-lite. It weighs almost nothing.
Hill: [laughs] Almost nothing, yeah.
Barker: Compared to the home, which, I haven't picked up any, but they're pretty heavy, from what I hear.
Hill: Yeah, if you've ever seen them on the highway, one of those trucks that has the sign on the back, "Give us a wide berth because we're hauling a home."
Barker: Wide load, yeah. You never see that on websites, wide load. What would it mean? A bad website. Somebody who doesn't know what the internet does, that's what you would conclude.
Hill: [laughs] Not to get in the weeds here on an actual business point, but why wouldn't Zillow disclose the amount of money that they paid? Given their track record, my assumption is, they didn't disclose what they paid for Mortgage Lenders of America because they were embarrassed by how much they paid.
Barker: I saw the CEO answering this question on CNBC today, and he said they didn't disclose because they were advised that it was not a material amount. That begs the question, why not disclose?
Hill: Right! "We got this thing for a song!"
Barker: Yeah. Whatever amount of money they spent on it is not material to the size of the business, which is an $8 billion business. Let's say they spent $50 million on it -- I think they probably spent more than that -- but, you could probably go out and figure it out, to within 20%, I think, if you had the right comps.
Bill Barker has no position in any of the stocks mentioned. Chris Hill 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.