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ZG Stock: The Two Faces of Zillow (and Why Investors Should Stay Away)

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Zillow Group (NASDAQ:ZG, Z) was subject to a stock split in 2015. ZG stock represents Class A voting shares, while Z stock represents Class C non-voting shares. The two move in tandem, but Class A shares trade at a slight premium since they control the decision-making.

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Besides being two stocks, Zillow has arguably been two companies over the past few years. One was an iBuyer who bought houses on speculation and tried to flip them. This business essentially failed last year. The other is a data company that helps determine the market price of homes. This company is doing pretty well.

What investors considering buying ZG shares need to understand is what they are worth.

Old Zillow

Much of the drop in ZG shares – from a high of $212.40 to below $50 currently – can be attributed to problems and possibly failure of the company’s iBuying group.

For the first three quarters of 2021, Zillow posted a loss of $267 million, or $1.07 per share, on revenue of $4.3 billion. During the release of its third quarter results on November 2, management also announced that it would close its iBuying business. Following the news, ZG stock fell from the mid-$90s to $60.

Zillow launched its iBuyer program, Zillow Offers, in 2018. In Q1 2021, it purchased
1,856 homes and sold 1,965 homes. In the third quarter, he bought 9,680 houses and sold only 3,032 houses. At the same time, Zillow was in fierce competition with open door (NASDAQ:OPEN) and Solutions offers (NYSE:OPAD) and drive up prices.

This resulted in a $304 million writedown for the quarter, which the company attributed to “unintentional purchases of homes at prices higher than our current estimates of future selling prices.” This language is troubling because it indicates that management does not admit failure.

The company is expected to release its fourth quarter and full year results on Feb. 9. Analysts expect the company to generate $2.76 billion in revenue for the fourth quarter and post a loss of $1.05 per share. But what investors will really focus on is how Zillow is shrinking its iBuying segment.

The new Zillow

The original Zillow was focused on real estate data sites including Zillow, Hotpads, StreetEasy, and Trulia. Before Zillow Offers took off, the company had reduced its annual loss to less than $120 million in 2018 and had positive operating cash flow.

The new Zillow, if you can call it that, competes the most with Realtor.com, whose data site is owned by News Corp. (NASDAQ:NWS) since 2014. After years in the shadow of Zillow, Realtor grew revenue 30% to $180 million in the third quarter of 2021. Meanwhile, News Corp’s entire digital real estate business . generated $426 million in revenue and $138 million in pre-tax profit. , depreciation and amortization (EBITDA).

Assuming Zillow is still #1 on the lists, you’re looking at a company that could generate $2 billion in business this year with $700 million in EBITDA. For this, investors pay 12.3 billion dollars. But that’s before the final liquidation of Zillow’s portfolio. It has value, even if it’s 5-10% less than management thought.

Zillow had nearly $1.8 billion in long-term debt at the end of September. The hope is that most of it is wiped out by liquidation.

The basics of ZG shares

Someone is going to get a good deal on ZG stock, but it’s hard to say when that will be. The ongoing liquidation of Zillow Offers real estate will make it difficult to obtain a proper appraisal for months. The resulting company may be worth only half of what the stock is currently trading.

It would make sense that Offerpad, OpenDoor, News Corp. or even a private equity firm evaluates all of this and makes an offer. But there is no guarantee that the bid price will be higher than today’s price.

Unless you’re prepared to do a lot of math first, I’d hold off on buying ZG stock for now.

As of the date of publication, Dana Blankenhorn does not hold a position in any of the companies mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is The Big Bang of Technology: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available on the Amazon Kindle store. Follow him on Twitter at @danablakenhorn.



ZG Stock: The Two Faces of Zillow (and Why Investors Should Stay Away)

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