Zillow Group (ZG -2.97%) (Z -2.86%), the largest online platform for buying and selling real estate, is in somewhat of a transitional period. Shares are sitting 61% lower than just one year ago after Zillow exited its iBuying business. Now, the company is finding its way forward while working to rebuild investor confidence after a volatile year. But is today's low share price and Zillow's vision enough? Here's a closer look at whether or not Zillow is a buy.
Redefining its future
Over the past four years, iBuying was the dominant focus for Zillow Group. But the program, which used algorithms to create cash offers for homes online, was announced as a failure -- losing an average of $27,000 per home after taxes at the end of 2021. Zillow was forced to redefine what's driving its future.
At the end of 2021, Zillow revealed its new brainchild, The Housing Super App, which will expand upon its current offerings through Zillow Closing Services, Zillow Rentals, Zillow Agents, and Zillow Home Loans to further enhance and simplify the renting, buying, and selling process.
In theory, the app will serve all aspects of the housing cycle, allowing prospective buyers or renters to virtually tour properties listed on the platform, get pre-approved for a mortgage or apply for a rental, submit deposits safely, pay the landlord through the Zillow management software, close on a home, and eventually relist the home for sale using one of Zillow's partner agents.
Image source: Getty Images.
Is the super app enough?
Zillow is the most widely used resource for the home buying, selling, or renting, with 198 million monthly users on average. The site gets billions of visitors per year, so if the super app is executed well, it could be welcomed by the market and a long-term driver for business. But right now, it's hard to tell if the app will boost revenue as the company hopes.
Zillow's internet, media, and technology (IMT) sector, which includes money earned from Zillow rental solutions, advertising fees from Zillow agents, and other income earned from technology solutions or marketing, is by far its biggest earner. From 2020 to 2021, earnings before taxes, interest, deprecation, and amortization (EBITDA) from IMT grew by 53% to $853 million.
Right now, Zillow is benefiting from a red-hot housing market, which is driving users to its platform. But despite high visitors, the company isn't capturing its full potential through transactions. Around 67% of home buyers use Zillow today, but Zillow is in only directly involved in around 5% of buying transactions and 3% of selling transactions, which is a huge gap.
The super app has the potential to convert users to transactors, but how it will differ from Zillow's existing services and current platform hasn't yet been explicitly defined. The good news is that with iBuying gone, Zillow can use the capital previously dedicated to buying, improving, and selling tens of thousands of homes each year to fuel its technological services.
Despite share prices being down 61% year over year, Zillow stock is still trading around 147 times earnings, which isn't unheard of among growth tech stocks. But it does mean investors are still paying a serious premium for something that could or couldn't pay off in the long run. The company has lofty goals, aiming to reach $5 billion in revenue by 2025, which is around $2.9 billion more than today. If Zillow gets this right, today's discounted share price could be a bargain down the line. But if the app follows suit with the iBuying business, investors could be sorely disappointed.
