You probably know that the real estate market is going through some things. The rise in interest rates is giving potential homeowners less bang for their bucks, and recessionary fears are keeping them from making hasty big-ticket purchases.
This doesn't mean that there aren't opportunities out there for investors. You just need to be patient if you're hoping to score a fair price on a fixer-upper that won't become a money pit.
Is Zillow (ZG -2.97%) (Z -2.86%) a fixer-upper? In some ways, it's been completely renovated.
The real estate portal made a big decision to bow out of its home-flipping business in late 2021. It was the right thing to do. If Zillow couldn't turn a profit in the "we buy ugly houses" niche when residential real estate was hot, it was going to be a wrecking ball when the market turned cold less than a year later. It was also embarrassing to the brand, since the ultimate collector of home hunting data and trends somehow couldn't get iBuying right.
Zillow served up its first-quarter results after Wednesday's market close. It was a well-received report. The company's shares moved 5% higher in after-hours trading on Wednesday night. The numbers may not seem very exciting, but let's check out this quarterly open house to see if Zillow is finally in move-in condition for investors looking for new digs.
The mother of all home makeovers
Zillow reported $469 million on the top line for the first three months of 2023, a far cry from the $4.3 billion in consolidated revenue it initially announced a year ago for the same period. But that was a different Zillow.
Flipping high-priced houses was good for juicing-up revenue, but it crushed the bottom line. Zillow was winding down that profit-draining business, and it now has restated its financials so we can get a clearer snapshot of the company's continuing operations.
Instead of a nearly 90% year-over-year decline in revenue, Zillow's top line declined a better-than-expected 13%. Zillow's own guidance from mid-February was modeling just $404 million to $437 million in revenue.
Zooming in a bit closer, residential revenue -- the core of Zillow's business that currently accounts for 77% of the total top-line mix -- declined 14% to $361 million. A double-digit decline is rarely a good look, but it's not too shabby considering the deterioration of the residential real estate market in that time.
Zillow points out that its residential revenue outpaced the broader real estate market by 1,300 basis points in total industry dollars. It sees the trend continuing in the current quarter.
Rentals revenue was a bright spot, up 21% for the quarter. Home hunters were numbed by the surge in financing rates, but that only drove more consumers to ride things out through rentals or leases, instead. This should be a segment that holds up well when buying activity cools down. Unfortunately for Zillow, at $74 million in revenue for the quarter, it's just a 16% slice of the revenue-mix pie.
Finally, we have just $26 million in mortgage revenue, down a blistering 43%. Surging rates shut out potential homebuyers but also added insult to injury by freezing the refinancing market, too.
Image source: Getty Images.
Closing the sale
Zillow's bottom line showed a net loss of $22 million, but its positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $104 million cruised past the $48 million to $63 million that it was targeting for the quarter less than three months ago.
It's not fair to say that Zillow is turning the corner. Fresh guidance for the second quarter calls for a 5% to 11% year-over-year decline in revenue. The company's adjusted EBITDA outlook for the current quarter is a range of only $48 million to $63 million.
It could be worse. Zillow may be gaining market share in terms of total industry dollars, but a thicker slice of a shrinking pie could still leave you with a grumbling stomach. This isn't Zillow at its best, but getting back to its roots will make sure that the company becomes even more explosive when the residential real estate market picks up.
No one can promise you when real estate stocks will be hot again, but it will happen at some point. Zillow will make sure it has an even stronger market leadership position when the time is right.
