What happened

Shares of Zillow Group (NASDAQ:Z)(NASDAQ:ZG) surged 25.7% in the first half of 2020, according to data from S&P Global Market Intelligence, taking the stock from $46 per share to $57 per share.

It wasn't exactly the smoothest ride higher, considering the stock tanked to as low as $24 per share in mid-March before rebounding much higher.

So what

Zillow's business was humming along until the COVID-19 pandemic hit the U.S. in March. The company took drastic measures to limit losses and preserve liquidity, including implementing a hiring freeze, reducing and delaying marketing spending, pausing home buying in the Zillow Offers iBuying business, and reducing all discretionary spending.

But Zillow always had substantial liquidity on its balance sheet, including about $2.5 billion in cash and investments at the end of February. On a March 23 investor update conference call, management walked investors through a severe stress test scenario to see where the company's liquidity position would be at year-end.

A home buyer couple hug in the front yard of their new house.

Image source: Getty Images.

Some of those assumptions in that stress test were:

  • Internet, Media & Technology (IMT) segment, including Premier Agent (PA), revenue would be down 75% and stay there for the remainder of the year. 
  • Management executes the 25% cost reductions planned, but no more.
  • Zillow is unable to sell any of the homes it owns and even 75% of the home sales it was under contract to sell fall through.
  • Zillow is forced to put all of these homes on its balance sheet with 100% equity financing.

Even in that dire scenario, Zillow would still have $1.35 billion of cash and short-term investments. That was especially conservative because if that scenario did play out, the company would have cut costs further, which would have resulted in more cash than that at year-end.

Now what

Since the most uncertain days of March and April, Zillow has been reporting strengthening home buyer demand. Traffic to the company's website has recovered and was recently up a double-digit percentage on a year-over-year basis. And requests for connections with Premier Agents has also rebounded to exceed mid-March levels.

Over the last several weeks, Zillow has even resumed home buying in select markets. That came far sooner than most investors initially expected.

The benefit of this period for Zillow is that there is greater demand than ever for Zillow's technology solutions, including 3D home tours, e-signings, and remote closings as home buyers increasingly want to limit in-person contact.

Investors should consider Zillow well positioned for the future, especially as declining mortgage rates make homes more affordable.