What happened
Shares of Zillow Group (ZG -1.10%) popped by as much as 11% this week, according to data from S&P Global Market Intelligence. The online real estate company posted strong fourth-quarter earnings that beat Wall Street expectations. As of this writing, shares of Zillow Group are up 5.2% for the week.
So what
On February 15, Zillow updated investors with its financial results for the fourth quarter of 2022. Revenue declined 19% year over year to $435 million. However, this was higher than the $413 million estimate heading into the earnings release.
Zillow is navigating a difficult housing market at the moment. With mortgage rates rising at the fastest pace in history and coming off of historic lows, many buyers are getting frozen out of homebuying right now. This has caused the housing market to freeze up in the United States, with existing home sales down 34% year-over-year in the fourth quarter of 2022.
How does this affect Zillow? Well, since it is a housing superapp, its core business model is to sell advertising to real estate agents who are trying to promote listings on the platform. If fewer people are buying homes, that means less demand for Zillow's promotional services, which means less revenue for the period.
Zillow's CEO sounds optimistic about housing demand in 2023 with tons of new supply coming online, but the company is still at the whim of the overall housing cycle in the United States. Luckily, it has fully exited its iBuying home-flipping business, which would be struggling mightily in a jammed-up residential real estate market.
Now what
Revenue declines are not the biggest concern for Zillow shareholders. The company is always going to be affected by the booms and busts of the housing market, which will lead to some inconsistencies with its revenue generation each year.
The real concern at Zillow is its lack of profitability. Last quarter, operating income at its core internet, media, and technology (IMT) segment was negative $22 million. This is a business that has been around for over a decade and should be able to generate a profit even if revenue declines slightly year over year. The fact that it lost money this quarter is not a good sign.
If Zillow can't make any money as the housing market transitions from the booming period coming out of the great financial crisis to a bust in the 2020s, that is bad news for shareholders.
