When Zillow (Z 1.13%) (ZG 1.30%) decided to exit the iBuying business, many investors lost faith in the company overnight. Not only was iBuying seen as a disaster, but management's handling of the shutdown of the business was looked at even less favorably, because the company sent mixed messages for weeks before pulling the plug. The stock price is down more than 68% from 52-week highs.
But if we take a fresh look at Zillow's business today, there's a lot to like. This is the go-to spot for home shopping, and it's a valuable resource for realtors around the world. That core is profitable, and as Zillow adds more services like mortgages and title offerings, I think the stock could do very well for investors from here.
Zillow's core business is great
The core of Zillow's business is the internet, media, and technology business, or IMT, including the Zillow app. Zillow charges for advertising and other services to connect realtors to home buyers and sellers. In the fourth quarter of 2021, IMT generated $483 million in revenue, up 14% from a year ago, and $137 million in income before taxes.
The other major segment is known as mortgages today, but I think it's safe to say that products like title, moving services, insurance, and others could be bundled with a mortgage to create a one-stop-shop solution for homebuyers in time.
It's with this understanding of Zillow's business that we can start to evaluate its market cap of $12.1 billion.
Segment | IMT | Mortgages |
---|---|---|
Revenue | $1.89 billion | $245.8 million |
Income before taxes | $544.6 million | ($51.8 million) |
Based on these numbers, Zillow's remaining businesses trade for about 25 times income before taxes. The company's price-to-sales ratio is under 6. These seem like reasonable multiples for a business that's growing by double digits annually.
The iBuying exit may not be all that bad
While the exit from iBuying may not be what investors were looking for, it may not be all that bad for earnings short-term. When Zillow announced it was exiting iBuying, management projected an additional loss of $240 million to $265 million in the fourth quarter of 2021, but that loss was only $93 million because of strong housing prices. I think it's safe to say that selling homes in early 2022 is likely to be selling into a strong pricing environment as well.
Management said the equity in homes right now will more than cover potential losses, so this shouldn't be a drain on the $2.6 billion in cash already on the balance sheet. So Zillow's business is strong, and its balance sheet looks very solid as well.
Zillow is still a great company
It's hard to get past the idea that Zillow isn't the company we thought it would be a year ago, but what's remaining without iBuying is still a great company. Zillow's core business is extremely profitable, it's growing, and there are ancillary services the company can offer now that it's focused on serving real estate agents rather than competing against them.
Taking a fresh look at a company is hard, but in the case of Zillow, it's confirmed that this is a company I still want to own long-term. The investment thesis has changed, but instead of being a moonshot with iBuying this is now a solid growth tech stock, and that may be a safer place for investors to be long-term.