In February 2021, Zillow Group ( Z -0.73% )(ZG -0.70% ) the stock printed an intraday high of $202 per share. The stock has since plummeted 74% on concerns over the abrupt end of the company’s largest business segment and suffered a double whammy with the recent market selloff.
Zillow Offers, the company’s bankrupt iBuying business, was once Zillow’s main revenue generator. The now defunct business unit purchased homes directly from willing sellers with the intention of flipping the homes for profit. This arrangement didn’t quite work out, forcing Zillow to exit the segment altogether and take a big financial hit.
But Zillow is a diverse company with other big brands, and is now focused on becoming the go-to digital real estate platform for buyers and sellers. To achieve this goal, Zillow will rely on its roots as a tech powerhouse – and it might be worth going for it.
What went wrong
The iBuying process is appealing because it saves sellers the hassle of hiring a real estate broker, listing their home on the market, and potentially enduring months of home viewings and general uncertainty. Zillow offers allowed sellers to request a “Zestimate” for their home online. If the sellers accepted the offer, Zillow would make the purchase and close the home in days, rather than weeks or months.
Zillow Offers used an algorithm that considered a home’s location, age, condition, and a host of more complex data points to determine the property’s value and whether it was worth the worth buying. This is where the company ran into trouble. Historically low interest rates caused rapid movements in house prices during the pandemic, and Zillow’s algorithm struggled to make accurate future predictions based on data from unprecedented market conditions.
The company’s strategy also relied on high volume, which ultimately caused Zillow Offers to stretch too much. In 2021, he purchased 23,935 homes in over 35 markets across the United States. For context, a smaller competitor Block of offers operates in half the number of markets and focuses on high quality opportunities.
Such a brutal approach to the real estate market made algorithmic precision paramount. Additionally, any decline in market-wide housing prices would have catastrophic financial consequences for Zillow’s home inventory. While there have been periods of strong performance in Zillow’s iBuying business, those moments were short-lived and generally coincided with swings in the housing market that worked in the company’s favor.
The end result of this venture: an $881 million loss in 2021 from Zillow’s iBuying segment alone.
What Zillow is doing now
To recover from the end of its iBuying segment, Zillow is looking to the future. The company plans to simplify the notoriously complex real estate process with a “housing super app,” which will connect consumers to Zillow’s industry partners through a suite of digital solutions to make buying and selling a home easier. While the current Zillow app focuses on finding residential real estate, the super app would offer referrals, mortgage originations, and title and escrow services.
This awesome app would also host existing Zillow businesses, such as Zillow Closing Services and Zillow Home Loans. Premier Agent, one of Zillow’s biggest brands, offers technology services to real estate brokers and connects them with active buyers and sellers; the software also shares proprietary data proprietary information with Zillow agents. The goal behind these existing platforms is to provide agents with greater visibility, more leads, and the tools to successfully close deals. The planned super app will combine these services with others aimed at consumers.
Currently, Zillow captures $4,100 in transaction fees per house sold out of a possible $17,000. By expanding its services to maximize potential revenue per home sold, Zillow estimates its market opportunity could be $300 billion per year.
Building towards a significant market share will take time. In 2021, Zillow generated $2.1 billion in revenue (excluding Zillow offerings) and expects it to reach $5 billion in revenue by 2025, a growth of 138%. This is a significant increase, and estimates suggest it will also come with higher profit margins.
Zillow is already the number one real estate app in the United States. With 4 million daily active users, it has three times more than its nearest competitor. This existing level of engagement is a fantastic starting point in Zillow’s journey to capture a growing share of the real estate transaction market.
This real estate tech company is just getting started. The 74% crash in Zillow stock could turn out to be a major buying opportunity looking back 10 years from now.
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