Zillow Didn’t Really Downsize

These days, many tech companies are valued on a multiple of revenue and, at first blush, Zillow’s top line looks good. In the first quarter of 2019, Zillow posted revenue of $454 million. By the first quarter of next year, that number is expected to be roughly seven times that amount. But that figure includes an ambitious closeout of a lot of this year’s costly and overzealous buying spree.

By the quarter ending in March 2023, Wall Street is forecasting that Zillow will post revenue of $636 million—just 40% more than what it generated four years prior. And the reversal could happen even faster: Zillow late last week said it has sold, is under contract to sell or has reached agreement on disposition terms for more than half of the homes it expected to resell. Not being stuck with a tremendous amount of inventory as the market turns is broadly a good thing. It also means Zillow’s days of triple-digit revenue growth are limited for now.

As Zillow said last month, its iBuying business was deemed too volatile, too narrow and to have too little opportunity for return on equity. Exiting certainly removes significant risk, but investors coveting Zillow without that baggage should ask themselves what exactly has been gained.

Profitability has improved. While iBuying has weighed on the company’s overall margins, the Premier Agent business, which essentially finds leads for agents, has continued to see its margins expand. In its third-quarter shareholder letter, Zillow said it expects adjusted earnings before interest, taxes, depreciation and amortization for its internet, media and technology segment, which houses the unit, to grow nearly 3.5 times from 2018 to the midpoint of its outlook range for this year.

Just how much better the underlying business is remains to be seen, though. For all the time consumers spent searching online listings during the pandemic, Wall Street is forecasting the platform’s monthly unique users will have grown just over 25% by the end of March (the start of real estate’s peak spring buying season) compared with three years earlier.

Analyzing the growth in Zillow’s user base is important as the company changes direction. With iBuying, Zillow said it was able to convert only about 10% of serious sellers who asked for an offer, disappointing many potential customers. Now the company wants to expand its addressable market. Some market specialists, such as Mike DelPrete, scholar-in-residence at the University of Colorado Boulder, already are talking about Zillow 3.0, predicting a near-term game plan whereby Zillow becomes a power buyer. Such services provide temporary financing to home buyers who must compete with non-contingent cash buyers. Perhaps a coveted service in today’s hypercompetitive real-estate market, it might not be as valuable once things cool down. Furthermore, it could wind up being capital intensive or involve Zillow taking out more financing of its own. Somebody ultimately has to put the money on the table.

With or without iBuying, the real-estate industry is undoubtedly migrating online. But limited inventory and a return to the office over the coming years suggest we might have seen the height of the mass consumer relocation that Zillow’s chief executive officer, Rich Barton, has termed “The Great Reshuffling.” How long can Zillow surfing remain America’s favorite pastime?

Write to Laura Forman at [email protected]