How Zillow Wants to Appeal to More Homebuyers

When Zillow Group Inc. (NASDAQ: ZG) reported second-quarter 2018 results after markets closed Monday afternoon, the consumer real estate firm reported a net loss of $0.02 per share on revenue of $325.25 million. In the year-ago quarter, the company reported a net loss of $0.12 per share on $266.85 million in revenue.

Adjusted earnings per share totaled $0.13 compared with a consensus estimate of $0.09. Quarterly revenues fell a bit short of the consensus expectations for $326 million.

The somewhat mixed report, on its own, was probably not enough to take the stock down 18% in early trading Tuesday morning. The downturn is more likely the result of the company’s announcement that it has agreed to acquire mortgage lending firm Mortgage Lenders of America for an undisclosed amount.

With the acquisition, Zillow continues to expand its business model to include a deeper penetration into the actual buying and selling of homes. One analyst, Nat Schindler of Merrill Lynch, is not convinced this is the right move for the company.

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Schindler this morning cut his rating on Zillow shares from Buy to Neutral and cut his price target from $70 to $60. The changes the company has introduced in its business model are causing Schindler’s team to “limit our optimism on FY19 upside.”

Zillow cut its revenue estimate for its homes segment from its April level of $190 million to $30 million for the 2018 fiscal year. The acquisition of Mortgage Lenders of America is intended to make buying a home more friction-free, but it is a capital-intensive business that means less profit to pass on to shareholders.

The company reported no revenue from its homes segment in the second quarter and forecast third-quarter revenues of just $2 million to $7 million. For the full year, Zillow estimates $20 million to $40 million in homes segment revenues.

Zillow also may be putting some of its advertising revenue at risk by competing with other lenders who offer mortgages to Zillow’s users. Zillow’s president of media and marketplaces, Greg Schwartz, said:

Now that we are buying and selling homes through Zillow Offers, we believe that having our own mortgage origination service as an option for consumers will allow us to streamline the process for people who buy a Zillow-owned home. Over time, we expect the work we do in conjunction with this new line of business will help us expand our offerings to our partners – including real estate brokers with existing in-house mortgage operations and third-party lenders who co-market with Premier Agents.

The company’s customers might have a different take on Zillow’s lending business.

The company’s stock traded down 17.5% in the late morning Tuesday to $48.68, after closing at $59.00 on Monday. The 52-week trading range is $37.96 to $65.42, and the consensus price target is $56.06.

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