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Could Zillow's Fears Be The Key To Zillow's Growth?

By Rebecca Shore - Nov 5, 2019 at 3:59PM

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Investors are concerned by the prospect of another housing market crash, and Zillow's forays into mortgage lending and house flipping are not reassuring. But it could be a good time to snatch up shares before it reports earnings Thursday.

Zillow Group ( ZG 2.62% ) hopes to be much more than the app you use to see how much your neighbor's house is worth. The company, founded in 2006 and based on Seattle, aims to insert itself in every major part of the home-shopping process, from "A" -- access to listings of homes for sale or rent -- to "Z" -- Zillow Home Loans, its affiliated lender, which provides a way to get mortgage pre-approvals and financing. These moves could put it at risk if there is a housing crash, though. 

Last year, the company launched Zillow Offers, its foray into "iBuying," the already crowded instant-homebuying market. Through the service, potential sellers can get quick cash offers for their homes, skipping the work of prepping their home for sale (cleaning, making repairs, staging, etc.); but it comes at a premium. Users pay an average of 7.5% on the sale price of their home.

Two-story house with For Sale sign (with SOLD  tape overlay) in foreground.

Image source: Getty Images.

In the second quarter of 2019, Zillow bought more than 1,500 homes and sold nearly 800. But it's aiming much higher. MarketWatch said the company sees the potential for buying 5,000 homes a month, originating more than 3,000 loans a month and realizing annual segment revenue of $2 billion. Zillow offers an important competitive advantage in the home-buying market: information about demand collected from its 180 million website visitors each month.

Zillow's CEO Richard Barton calls the move into the market "essential." Barton, a co-founder of Zillow, returned in February to lead the company. He compares Zillow Offers to Netflix's entry into video streaming despite a thriving DVD rental business. (Barton was on the board at Netflix when the company made that decision as well as the move to create its own original content.)

And Barton puts his money where his mouth is, buying $3.6 million worth of Zillow shares at about $27.14 per share during the past year. (Many investors like to check how much of a company is owned by insiders as an indicator of how optimistic its leadership is about its prospects.) Zillow Group insiders own 10% of the company, worth about $701 million.

A cloudy housing market outlook

Does Zillow even need to worry about a housing market crash? Last week, the Federal Reserve cut interest rates for the third time this year in a largely expected move. The Fed's first two rate cuts this year helped stabilize the housing market, so the rate cut greatly reduces the odds of a housing crash, right? Not so fast.

According to The New York Times, few economists expect the housing market to take off in response to last week's cut. These economists cite three reasons the rate cut might not be the balm to soothe housing market concerns: 1. It's difficult for would-be homebuyers to get a mortgage. 2. It's hard to find an affordable home to buy. 3. Rates are already low; they may not get much lower.

Path to profitability

The company's second-quarter losses and its big bet in the home-buying market raise concerns over its path to profitability. The outlook for the third quarter includes an expected acceleration in the Homes business but tepid results for the Internet, Media & Technology segment, which includes the legacy Premier Agent business. Nevertheless, the earnings report might help Zillow's stock move higher if it beats analysts' estimates. 

For those looking for ethical companies to back with their investment dollars, Zillow is a decent choice. Zillow was named to Fortune's 2019 100 Best Companies to Work For. And the company earned a place on Forbes' "Just Companies" 2019 list.  (The list looks at seven priorities, including paying workers fairly, treating customers well and protecting their privacy, producing quality products and minimizing their environmental impact.)

Zillow looks like a good buy ahead of its earnings report since expectations seem low; if Zillow beats analysts' estimates, the stock may move higher. And the numbers look positive, too, compared to competitor Redfin ( RDFN 1.89% ), for a long-term growth investment. Redfin's price-to-earnings-growth (PEG) ratio is -3.83, while Zillow's is -10.92, indicating it is poised for growth.

Zillow's investors aren't likely to have buyer's remorse in the long-run.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Zillow Group, Inc. Stock Quote
Zillow Group, Inc.
$61.85 (2.62%) $1.58
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Redfin Corporation
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