Zillow (NASDAQ:Z) soared after its latest earnings results and for good reason. The company had just announced its intentions to exit the iBuying business one quarter prior, and was able to make significant progress in selling off its inventory. The pricing on those sales was surprisingly mild, and the company guided for more accelerated sales moving forward. Z shows its intentions to build a housing “super app” and also gave aggressive long term guidance, which if met, would present substantial upside over the next 4 years. With the stock trading around 30x earnings excluding its iBuying business, the stock is cheap enough to buy on the expectation that it comes anywhere close to meeting guidance.
Zillow Stock Price
At one point during the #meme stock craze, Z found itself trading above $200 per share. The stock has since pulled back significantly and now trades around $55 per share.
That places the stock at just 10% higher than where it traded in 2017. The poor stock price performance has created an excellent buying opportunity.
When Did Zillow Release Earnings?
Z released earnings on Thursday February 10th. The stock has since rise more than 20%, as the company’s updates regarding its wind-down of its iBuying segment were very promising, as well as its issued long term guidance.
Zillow Stock Key Metrics
Overall revenues soared 392% to $3.9 billion, but this was primarily due to the aggressive wind down of the iBuying segment. The IMT segment revenues grew by 14% to $483 million, and this is the key metric to look at long term as it will be the driver of the core business.
The main focus in the near term is the Zillow Offers (iBuying) segment, considering that we are only one quarter removed from the company announcing its intentions to exit iBuying completely. Z had entered iBuying in 2018, making this exit a multi-year failure. But Z was able to offload $3.3 billion of inventory while losing only 6.9%.
In the quarter, Z sold 8,353 homes, far more than 5,000 homes it had guided to last quarter. I note that if you’re looking at the balance sheet position, inventory stayed constant at around $3.8 billion. This is because most of the houses sold were houses that Z had previously committed to buying prior to its wind-down announcement. On the earnings conference call, Z guided for most of its houses to be sold off by the second quarter of this year. Management also noted that it had already purchased all of the homes it had committed to buy in January, so moving forward, inventory should decline in-line with revenue from home sales.
Z guided for the next quarter to see up to $2.9 billion in additional homes sold:
Z expects the wind down to bring its balance sheet position from a net debt position of $1.7 billion, to a net cash position of $1.7 billion.
That would be consistent with the company’s given reasons for exiting the iBuying market: moving toward an asset-light business with higher profit margins.
Is Z Stock Likely To Go Up?
Despite the strong results, Wall Street analysts are in general skeptical of the company’s prospects moving forward. The average rating is 2.50, representing a neutral to mildly bearish rating.
The cautiousness is understandable, as the company’s exit from iBuying may signal poor management execution in the past several years. That said, there’s reason to be optimistic for the company’s prospects as it begins a new chapter.
Is Z Stock A Buy, Sell, or Hold?
Z is the dominant real estate app by a wide margin, controlling 63% market share of daily active app users.
Despite its exit from iBuying, Z is still trying to solve a large and important problem: the complexities of house transactions. In a world where everything is moving toward the digital realm, real estate transactions are in desperate need of digital transformation.
In this past earnings release, Z has announced its intentions to focus on what it calls a “Housing Super App.” Z wants to play an increasing role in facilitating real estate transactions.
Z has projected rapid growth from its core business. It estimates that it currently has around 3% of market share of customer transactions, from which it earns $4,100 per transaction. Z expects to double its market share to 6% by 2025, as well as increase its revenue per transaction by over 25%:
That would lead to the company having a $5 billion revenue run-rate with 45% EBITDA margins. Considering that the company is currently trading at a $14 billion market cap, those projections look very promising.
There’s reasons to be skeptical. In particular, the guidance calls for 24% annualized growth. That would represent a huge acceleration from the 19% average 3-year compounded growth rate:
Wall Street also appears skeptical, as consensus estimates call for only $3.8 billion of revenue by 2025:
Considering that Z has just disappointed investors by exiting the iBuying segment, after many years of treating it like a high conviction mission, it may make sense to show some cautiousness regarding their optimistic projections. That said, it is reasonable to assume that Z stock should perform very strongly if it can meet its projections, as they will vastly outperform consensus estimates. Z is currently trading at around 22x EV to EBITDA. I could see the stock still trading at around 18x EBITDA by 2025. Z has a net cash position and minimal maintenance capital expenditure requirements, making EBITDA a very close proxy to free cash flow. Assuming it reaches $2.2 billion in EBITDA, that would have the stock trading at around $40 billion by 2025, representing 185% upside over the next 4 years. That would represent a compounded annual return of 30%. That is a highly attractive return considering that excluding the iBuying segment, Z is highly profitable. In the latest quarter and excluding the iBuying segment, Z generated $113 million in GAAP net income and $165.7 million in non-GAAP net income for a GAAP net margin of 21.1% and non-GAAP net margin of 31%. While the 2025 revenue projection may be aggressive, the 45% projected EBITDA margin appears highly achievable (the company recorded a 39.6% adjusted EBITDA margin as of the latest quarter). It may be too early to determine if the company can meet its long term guidance, but the current stock valuation of 30x earnings allows for more than satisfactory upside even if the company misses slightly on the estimates. I should also note that the projected $1.7 billion net cash position following its iBuying exit would represent around 10% of the market cap. The main near term risk is downside surprise to pricing on home sales but the long term (and more important) risk is competition from competitors like Redfin (RDFN). Perhaps Z can make the argument that its renewed focus on its real estate app, without distractions from the iBuying business, will enable it to more aggressively invest in growth than competitors. I rate the stock a buy, as the stock trades too cheaply for what is quickly becoming an asset-light tech company.
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