Zillow (Z 3.39%) (ZG 3.88%) was one of the few stocks to move higher on Friday, and the biggest reason why was its announcement the company will buy back $750 million in stock. After exiting the iBuying business known as Zillow Offers in November, the company has seen its stock plummet by about 40%, and shares are over 70% off their highs for the year.
Is this a bullish sign for Zillow or a desperate measure by the company? The answer is a little mixed for now.
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Good news in Zillow's iBuying exit
One of the challenges Zillow had in exiting the iBuying business was unloading its inventory of homes. In an announcement late on Thursday, the company said it has come to terms to sell over half of the homes it previously owned and expects to generate revenue of $2.3 billion to $2.9 billion in the fourth quarter from home sales, up from its previously expected $1.7 billion to $2.1 billion.
The other big nugget of information was that management expects the wind down of Zillow Offers to be cash flow-neutral, including paying off $2.9 billion in debt related to the business.
It appears that iBuying isn't going to be a huge financial drag for Zillow, at least on a cash basis. And given how badly the wind down could have gone, that's great news for investors.
Betting on itself
The most interesting news was the $750 million stock buyback authorization, which is a huge number for a company that currently has a $13.8 billion market cap. If management can complete the buyback efficiently, they could reduce shares outstanding by over 5%, which would increase earnings-per-share (EPS) growth long term.
I don't think management would make this move if it didn't feel that getting out of Zillow Offers would be a huge drag and if it didn't have a core business that should generate cash long term. That's the bullish argument from this announcement.
On the flip side, Zillow could be using up some of its cash to appease investors who have lost confidence in the company.
Why this is bullish for Zillow
Once Zillow sheds its homebuying business, it should have a very profitable core. The internet, media, and technology segment reported $480 million in revenue and $130 million in income before taxes in the third quarter of 2021 alone, and revenue was up 16% for the year.
This should be a cash flow-positive business for the long term, and if management can now use that money to buy back stock instead of buying homes, it could be a good sign. Investors will want to see the core business continue to improve, but with a laser focus on that part of the business. In short, I think this is a good move for Zillow's buy-and-hold shareholders.
