What happened
Shares of Zillow Group (Z 5.15%) slipped as much as 19.3% this week, according to S&P Global Market Intelligence. The digital real estate platform didn't release any company-specific news. However, the broad market sell-off and rising interest rate environment likely caused investors to get nervous about Zillow's prospects over the next few years. As of market close on Thursday, the stock was down 18.8% this week.
So what
There was a whirlwind of news/events that affected Zillow stock this week. First, most simply, the broad market continued to tumble because of high inflation readings and fears over a recession. The Nasdaq 100 Index is down almost 10% just in the last five days, which likely brought Zillow shares down as well.
Image source: Getty Images.
Second, investors are likely fearing what a rising interest rate environment will mean for the real estate industry and therefore Zillow's business. The Federal Reserve raised rates by 0.75% this week as it continues to work to fight inflation. How does this relate to housing? Well, the majority of homes are bought using debt in the form of a 30-year mortgage. When the Federal Reserve raises interest rates, mortgage rates tend to follow.
Over the past year, mortgage rates went from around 3% to now close to 6%, making homes less affordable. In turn, this could decrease buying and selling activity through platforms like Zillow, which is how the company makes its money.
Lastly, Zillow competitors Redfin and Compass are laying off approximately 10% of their workforces due to a slowdown in their businesses, with Redfin saying May demand was 17% below internal expectations. Since Zillow competes with these two companies in the internet real estate sector, it is likely not immune from these business slowdowns either.
Now what
Zillow investors have had a rough past year, with shares down almost 75% in the past 12 months. It also shuttered its iBuying business late in 2021, which shook investor confidence. The stock now has a price of $29 compared to forward earnings per share (EPS) estimates of $1.84, indicating that investors have minimal confidence in how the business will perform in the coming quarters and years.
Zillow is definitely in a tight spot right now. But if you believe it can be the leading digital platform for real estate discovery and transactions, now could be a good time to buy shares with a decades-long time horizon.
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