Zillow Group, Inc.
Moat: 2.5/5
Understandability: 3/5
Balance Sheet Health: 4/5
Zillow Group, Inc. is a leading player in the real estate technology sector, operating primarily in the United States, and its affiliates help people find a place to live while connecting them with local real estate professionals and agents, and also offering mortgage, selling, financing, and rental services.
Investor Relations Previous Earnings Calls
The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.
Business Overview Zillow Group, Inc. (ZG) operates a portfolio of businesses primarily in the US, connecting people with local real estate professionals, agents, and helping them find properties for purchase, while also offering mortgage, selling, financing, and rental services, making ZG a large player in the real estate technology sector.
- Revenue Streams:
- The company generates revenues from several sources, categorized as follows:
- Homes Segment: Primarily revenue generated from the purchase and sale of houses (iBuying). The volume of homes and the prices are primary drivers of this segment. It can lead to large gains, but also cause major losses.
- Mortgages Segment: Revenues are generated from interest income on mortgages and fees.
- Internet, Media and Technology (IMT) Segment: Primarily revenues from advertising sales, both to real estate agents and other businesses, and a smaller portion comes from rentals revenue as well as other revenues from their different online services.
- The company generates revenues from several sources, categorized as follows:
- Industry Trends:
- The real estate sector is heavily influenced by interest rates, which affect mortgage demand.
- The online real estate market is competitive, with many players vying for market share
- Tech integration is increasing in the real estate business and more consumers are turning to the internet for finding properties.
- Shift toward rentals in certain geographic areas due to increase in home prices.
- Increased use of data analytics, artificial intelligence, and machine learning to personalize real estate experience.
- Margins:
- ZG has generally had strong gross margins, especially in its core IMT segment.
- The Homes segment has much more volatile margins, depending on property values and the efficiency of the company to buy houses at good prices and sell at prices that capture gains.
- The Mortgage segment is highly dependent on the interest rates, and therefore, prone to volatility depending on them.
- Competitive Landscape:
- ZG faces competition from real estate brokerages, other tech companies offering real estate services, new entrants, and even from “old style” real estate businesses.
- Key competitors include Realtor.com, Redfin, and Opendoor.
- Competition is expected to remain strong as all players aim to capture market share, leading to intense rivalry and need for innovation.
- What Makes the Company Different
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Zillow has a significant online presence and a large brand awareness which generates immense traffic to its website and mobile application.
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Zillow generates a lot of unique proprietary data, which gives the company a competitive advantage in terms of its ability to predict housing prices, recommend properties, and give market data to the public.
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Zillow is involved in the full home value chain, from buying a home, to selling it, to financing the transaction and is therefore, able to provide a complete ecosystem to its customers.
- Zillow has a lot of financial data, which gives them an edge to understand the market better than most of its competitors.
Financials Deep Dive Recent reports and earnings calls provide a wealth of information about Zillow’s financial health. Here’s a detailed breakdown:
- Revenue Growth:
- While the company experienced a volatile period due to its foray into iBuying and its subsequent exit of this business, the total revenue has had mixed results and is struggling to reach pre-iBuying levels.
- IMT segment is steadily growing and becoming the main business segment. The mortgage segment has had mixed revenues and is struggling.
- The housing segment’s revenues have mostly dissipated, given Zillow’s decision to close its iBuying business.
- Profitability:
- Profitability has become a major concern for the company, with increased costs in operations, marketing, and technology. The company is showing poor operating results.
- Gross profits, even though improving, are not as high as before. The company’s current profitability is a big concern and it must make a turn-around.
- Operating Expenses:
- ZG’s operating expenses have been increasing dramatically, eating into profits. The rise in marketing expenses is particularly noteworthy.
- The company has been spending a lot on restructuring, which has affected its profits, as well as employee layoff expenses.
- Cash Flow:
- The company is generating healthy cash from operating activities, which is good.
- However, it should be kept in mind that the operating profits are also being negatively affected by stock based compensation which does not affect the cash flows but inflates the operating costs.
- ZG has also undertaken significant investments recently, which will give them a better competitive position.
- Debt:
- Zillow’s long-term debt levels have increased significantly over the past years, mostly due to their foray into home buying and other acquisitions.
- They are paying much higher interest costs, as interest rates have climbed lately.
- Share Repurchases:
- The company has an active share repurchase program, which is partially designed to offset the dilution caused by stock options and other such equity compensation.
- Recent Concerns:
- Zillow recently closed its iBuying program, leading to significant financial volatility, accounting changes, write-offs, layoffs, and restructuring.
- The housing business was particularly affected, and the company had a large reduction in employees and resources.
- The management has emphasized that they are now focused on developing their core business and generating more revenues from that.
- The company has also been negatively impacted by the sudden increase in interest rates and lower mortgage demand.
Moat Analysis Zillow’s moat, while present, is not as strong as it used to be and can be easily eroded away if the company does not constantly innovate. Here’s a detailed look:
- Brand Recognition: Zillow has established a strong brand in the real estate sector, making it the go-to website for many people looking to purchase or rent properties, giving it some pricing power.
- Network Effects: The platform benefits from the network effects, with buyers attracting sellers and vice-versa. They are more effective in getting the needed amount of buyers and sellers to effectively carry out operations. However, the network effects are not as strong as it appears on the surface, because there are other platforms that are also able to attract buyers and sellers at similar rates.
- Data Advantage: Zillow’s unique data sets give it a competitive edge in forecasting prices and providing information in an easily understandable and accessible manner. This advantage is also limited, as the government and other institutions can provide such data.
- Switching Costs: As customers already use Zillow for buying and selling properties, they may have higher switching costs because they are accustomed to the platform. This is a limited factor, as Zillow does not have any particularly strong “lock-in” mechanisms.
- Overall Moat Rating: Zillow’s moat is a mix of strong brand and network effects, but can easily be disrupted if there are any better competing services. The data moat can be eroded if the same type of data is freely available through some other means. Therefore, Zillow has a moat of 2.5 / 5.
Moat Risks and Business Resilience Several risks can erode Zillow’s moat and affect its resilience:
- Intense Competition: Zillow faces stiff competition from other tech platforms, real estate brokerages, and new entrants. If it is unable to keep up with their pace, the company may lose market share.
- It is clear that the company is unable to prevent competition from eating into its business.
- Technological Disruption: New technologies may disrupt the online real estate sector. Some technologies could diminish or even replace Zillow, if they provide a better user experience.
- It can lead to a decline in the usage of the platform and even the demise of the company.
- Economic Slowdowns: A housing market recession, a decline in property sales, and a rise in mortgage rates can sharply depress Zillow’s revenues and profitability.
- The company is especially vulnerable to interest rate hikes due to its high debt load.
- Operational Challenges in IBuying and Mortgages: The company’s recent exit from direct home-buying and struggles in mortgage business demonstrate the operational and strategic challenges that Zillow faces in building and managing complex operations.
- It should reduce management confidence in being able to pull-off similar operations in the future.
- Brand Reputation: Zillow’s handling of its iBuying business damaged its reputation, resulting in many angry customers. If the company isn’t able to rebuild its brand perception, it could severely impact its future business prospects.
Understandability Rating Zillow’s business model is straightforward in some respects—it connects buyers and sellers of homes with real estate information and tools. However, it has several layers such as the mortgage business, data, and the complexity of real estate markets. Understanding the dynamics of these layers and their effects on ZG is complex and time consuming. A proper understanding of the company requires detailed financial analysis and a broader knowledge of macro trends and real estate industries. Hence the understandability rating is 3 / 5.
Balance Sheet Health Zillow’s balance sheet has been affected by their previous aggressive expansion strategy and has become somewhat debt laden.
- The assets are primarily comprised of intangible assets, property, plant, and equipment, as well as excess cash and investments. The company has recently written-off a considerable amount of assets, which negatively affected its book equity.
- On the liabilities side, the company has a lot of debt and a huge amount of deferred taxes, which have added to its liabilities and have made it slightly less attractive.
- Despite this, Zillow’s balance sheet can still be considered as relatively healthy with its large equity, investments, and cash reserves, which is why the business is given a score of 4 / 5.
Summary Zillow is a major player in the real-estate technology sector, but its moat is not as wide as other tech giants. The company generates healthy revenues and cash flow, but the operational profitability has become a big concern lately. It is important to consider the company’s sensitivity to interest rate changes when assessing its value, but the underlying framework laid out by the business can help provide stable growth for years to come. The company’s financial statements are quite complicated and therefore, it is extremely important to review it with diligence and care. Zillow needs a clear strategy to get back to profitability, but its future prospects do appear to be bright. Investors need to focus on the fundamentals of the business rather than short term trading opportunities to profit from long-term value creation.