In February 2021, Zillow Group (Z -1.76%) (ZG -1.50%) stock printed an intraday all-time high of $202 per share. Since, the stock has crashed 74% on the back of concerns about the abrupt end to the company's largest business segment, and caught a double-whammy with the recent market sell-off.
Zillow Offers, the company's failed iBuying business, was once Zillow's primary revenue generator. The now-defunct business unit purchased homes directly from willing sellers with the intention of flipping the homes for a profit. This arrangement didn't exactly pan out, forcing Zillow to exit the segment entirely and take a big financial hit.
But Zillow is a diverse company with other major brands, and is now turning its focus toward becoming the go-to digital real estate platform for buyers and sellers. To achieve this goal, Zillow will leverage its roots as a tech powerhouse -- and it might be worth going along for the ride.
What went wrong
The iBuying process is enticing because it saves sellers from hiring a real estate broker, listing their home on the market, and enduring potentially months of house showings and general uncertainty. Zillow Offers allowed sellers to request a "Zestimate" for their home online. If sellers accepted the offer, Zillow would make the purchase and close on the house within days, rather than weeks or months.
Zillow Offers used an algorithm that considered a home's location, age, condition, and a slew of more complex data points to determine the property's value and whether it was worth the buy. That, though, is where the company ran into trouble. Record-low interest rates caused rapid moves in housing prices during the pandemic, and Zillow's algorithm had difficulty making accurate future predictions based on data from unprecedented market conditions.
The company's strategy also relied on significant volume, ultimately causing Zillow Offers to stretch itself too thin. In 2021, it purchased 23,935 homes in over 35 markets across the U.S. For context, smaller competitor Offerpad operates in half the number of markets and focuses on high-quality opportunities.
Such a blunt approach to the real estate market made algorithmic accuracy paramount. Plus, any marketwide decline in housing prices would result in catastrophic financial consequences for Zillow's inventory of homes. While there were periods of strong performance in Zillow's iBuying business, these moments were short-lived and typically coincided with fluctuations in the housing market that worked in the company's favor.
The end result of this venture: An $881 million loss in 2021 from Zillow's iBuying segment alone.
What Zillow is doing now
To recover from the end of its iBuying segment, Zillow is looking to the future. The company plans to simplify the notoriously complex real estate process with a "housing super-app," which will connect consumers with Zillow's industry partners through a suite of digital solutions to help make buying and selling a home easier. While the current Zillow app focuses on residential real estate search, the super app would offer referrals, mortgage originations, and title and escrow services.
This super app would also host existing Zillow businesses, like Zillow Closing Services and Zillow Home Loans. Premier Agent, one of Zillow's largest brands, offers technology services to real estate brokers and connects them with active buyers and sellers; the software also shares proprietary data insights exclusively with Zillow agents. The goal behind these existing platforms is to provide agents with more exposure, more leads, and the tools to successfully close deals. The planned super app will blend these services with more consumer-facing ones.
At the moment, Zillow captures $4,100 in transaction fees per home sold out of a possible $17,000. By expanding its services to maximize potential earnings per home sold, Zillow estimates its market opportunity could be $300 billion per year.
Building toward meaningful market share will take time. In 2021, Zillow generated $2.1 billion in revenue (excluding Zillow Offers), and predicts it will reach $5 billion in revenue by 2025, representing 138% growth. It's a meaningful increase, and estimates suggest it will come with higher profit margins, too.
Zillow is already the number one real estate app in the U.S. With 4 million daily active users, it has three times that of its nearest competitor. That level of existing engagement is a fantastic starting point on Zillow's journey to capture a growing portion of the real estate transaction market.
This real estate technology company is just getting started. The 74% crash in Zillow's stock might prove to be a major buying opportunity when looking back 10 years from now.