Zillow Group's (ZG -1.92%) (Z -1.82%) stock has been crushed during the current coronavirus downturn, having fallen from a February high of $66 per share to a recent low of $24 per share. That was a staggering 64% decline before a recent bounce back to the high $30s.
While Zillow will face increasing headwinds from regional lockdowns, housebound people, and social distancing, the company clearly has the balance sheet and liquidity position to survive and eventually thrive on the other side of this. On Monday, the company's management team hosted an investor update conference call about this topic. Here are the three biggest takeaways.
Strong balance sheet
Zillow has $2.1 billion of debt on the books, but the nature of this debt makes it much less concerning. About $563 million of it is asset-backed debt -- essentially mortgage debt on the homes Zillow owns. The debt is non-recourse to Zillow because it's backed solely by those homes, which were worth $645 million at the end of February.
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The other $1.6 billion of corporate debt matures at various times over the next six years, with only $470 million due before 2023. It's also convertible debt that Zillow can either settle in cash or stock, so even in an adverse scenario where the company needs to preserve cash, it could settle these maturities with stock instead.
In addition, Zillow has $2.5 billion of cash and short-term investments on hand as of the end of February. That means Zillow could pay off all its debt in cash in the unlikely event that it had to for some reason. That's certainly a secure financial position.
Actions being taken
Zillow has taken several actions to adjust to the current environment and preserve liquidity. First, it is cutting 25% of its operating expenses relative to its 2020 budget. That means it has paused all hiring, eliminated most marketing spending, cut other discretionary spending, and paused home purchases under the Zillow Offers business. If the economic fallout from coronavirus worsens significantly, the company has room to make further cost cuts, if necessary.
Zillow Offers had its fastest home sales pace ever in January and February, which has helped raise cash. As of March 19, the company owned 1,859 homes, down from 2,707 homes at the end of last year. The company is also seeking to extricate itself from some of its contracts to buy homes citing the "material adverse change" clause in its contracts, and potentially compensating homeowners for the inconvenience.
Worst-case scenario
On the call, Zillow co-founder and CEO Rich Barton laid out a worst-case scenario stress test to illustrate how it would affect the company. For the stress test, Barton assumed the following:
- Revenue in the core Internet, Media, and Technology (IMT) segment and Mortgage segment falls 75% for the rest of the year.
- Management executes the 25% cost reductions it has already announced, but nothing else.
- 75% of its homes that are under contract to sell fall through, and the company sells no other homes.
- The company is forced to pay off the asset-backed debt supporting the homes it owns.
By the company's estimates, this highly conservative scenario would result in Zillow still having $1.35 billion of cash on hand at the end of 2020. In Barton's view, this scenario is especially conservative because if all these adverse factors played out, the company would execute more cost reductions than just the 25% it is already doing.
Investors should appreciate that Zillow will face serious headwinds from the current environment, but it will almost certainly survive to see the other side of this coronavirus mess. That should put it in a strong position to pick up where it left off.
