Zillow stock falls 9% after disappointing forecast in ‘uncertain’ real-estate environment

Zillow Group Inc. blew away revenue expectations for the first quarter Thursday, but reflected the uncertain future for the real-estate industry with a disappointing forecast, pushing shares down in after-hours trading.

Zillow
Z,
-4.35%
ZG,
-4.30%
reported a first-quarter profit of $16 million, or 6 cents a share, on revenue of $4.26 billion, up from $1.22 billion a year ago. After adjusting for stock compensation, restructuring costs and other effects, the company reported earnings of 49 cents a share, up from 44 cents a share in the same period last year. Analysts on average expected adjusted earnings of 24 cents a share on sales of $3.36 billion, according to FactSet.

“With forecasts varying widely, one thing that is clear about the 2022 housing
market is that the path ahead is uncertain,” Zillow executives wrote in a letter to shareholders Thursday. “Inventory levels remain low, new for-sale listings remain down year over year, and our average page views per listing were at record highs in Q1, demonstrating the ongoing supply-demand imbalance.”

Zillow’s revenue has exploded higher in recent months as the company looks to unload houses it purchased last year in a flurry of activity that eventually led to the company halting its iBuying business and laying off staff. In the first quarter, Zillow sold 8,981 homes and bought 231, and the period ended with the company still holding 1,300 homes, with agreed-upon deals for all but about 100, executives said in a letter to shareholders.

“As of Jan. 31, 2022, we are no longer acquiring homes,” executives told shareholders in a letter, adding they expect the sales of remaining inventory to be “substantially complete” in the current quarter.

The problem for investors is the unknown on the other side of the unwinding of the iBuyer business. Zillow executives guided for second-quarter revenue of $903 million to $1.03 billion, well short of analysts’ average estimate of $1.83 billion.

Zillow executives say their goal after winding down the iBuyer business is to focus on melding the assets of its other two segments — Internet, Media and Technology, or IMT, as well as the mortgages business — into a mobile app that can help buyers and sellers navigate the entire home-buying and -selling process. The IMT segment grew revenue 10% to $490 million in the first quarter, matching the average analyst estimate of $490 million, and mortgages produced revenue of $46 million, down from $68 million a year ago and below the average analyst estimate of $47 million.

The forecast for those two segments was well lower than analysts expected, however. Zillow executives predicted second-quarter IMT revenue of $472 million to $492 million, while analysts on average were modeling $523 million, and mortgages revenue of $31 million to $39 million, undershooting the average analyst estimate of $50 million.

Zillow stock fell 9% in after-hours trading following the results, after closing with a 9.9% decline at $39.78 on a rough day on Wall Street. The stock has lost nearly two-thirds of its value in the past year, falling 65% as the S&P 500 index
SPX,
-0.57%
has gained 3.2% in that time.

Pessimism about the residential real-estate market has been growing, as the Federal Reserve’s interest-rate hikes send mortgage rates to levels unseen since the Great Recession forced major cuts more than a decade ago. Pending home sales have declined for five consecutive months amid the rate increases, and more Americans now believe it is a bad time to purchase a house than at any other time since at least 1978, according to Gallup.

Valuations for online real-estate companies were already in question after Zillow dramatically dropped out of the iBuyer business last year and Redfin Corp.
RDFN,
+3.53%
reported massive fourth-quarter losses. With the worrisome dynamics of the housing industry, those doubts have only grown louder.

Opinion: Zillow thought it could rule the housing market. It was very wrong.

“While we remain constructive on technology disruption in residential real estate and view the key disrupters as the future leaders of the industry, in the near term it is difficult to see what gets this group working while in the kind of rising-rate environment we are in right now,” Wedbush analyst Ygal Arounian wrote in a Monday note. “Investor sentiment is materially bearish, and we are likely going to see downward estimate revisions at least this quarter and possibly in the coming quarters as well.”

Arounian retained “Outperform” ratings for Zillow, Redfin and iBuyer Opendoor Technologies Inc.
OPEN,
-6.15%,
but dropped estimates for financial performance in future quarters as well as price targets for all three stocks. He believes there could be more widespread changes in sentiment for the sector ahead.

“While we think these stocks will again work over time, and for long-term investors you could even consider these strong entry points, in the near term we don’t see the kind of catalysts that will change investor sentiment, that can lead to a rerating in this sector.”

The uncertain nature of the real-estate market and its intended “disruptors” showed in the reaction to their respective quarterly financial reports Thursday. Opendoor shares jumped about 14% in after-hours action after the iBuyer reported GAAP net income for the first time while beating revenue expectations by nearly $1 billion. Redfin shares were about 1.5% higher after the company easily outdistanced expectations for first-quarter earnings and revenue, but came up slightly short on its forecast.

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