Here’s why Zillow’s stock has fallen 23% since June

Zillow Group is on track to make $1 billion this year, but it’s been a topsy-turvy few months for the stock.

Shares of the Seattle-based real estate giant — which is facing major backlash in New York over attempts to make money off brokers through various StreetEasy programs — closed at $39.62 on Aug. 31. That’s a nearly 23 percent drop from $51.23 in mid-June. And there have been several bumps and dips since.

For a little context: Zillow stock is trading 15 percent higher than it did last year at this time, so on balance, things look pretty solid. Though the stock hit a low of $31.22 per share in October, Wall Street is still bullish on Zillow’s prospects. “Across the ‘Net sector, Zillow remains one of the best growth stories,” analysts at RBC Capital Markets wrote in a research note Aug. 9, a day after the company reported its second-quarter earnings. According to RBC, Zillow enjoys a “strong competitive position” and, better yet, has tapped less than 10 percent of its core audience.

But the company isn’t immune from market shifts — whether it’s Amazon’s rumored foray into real estate or its own struggle to turn a profit. “The amount of backlash Zillow is facing in New York seems to be the biggest, strongest, most concerted battle against Zillow that I’ve seen,” said analyst Mike DelPrete of AIM Group, a media consulting firm.

Here are seven factors weighing on Zillow’s stock price:

1. It’s about the money! Always! The company’s not profitable — thanks to big-ticket expenses like technology and marketing. Last year, Zillow recorded a net loss of $220.4 million despite $847 million in revenue. That’s up from 2015, when the company lost $148.9 million and notched $645 million in revenue. Despite attempts to bring expenses and revenue in line, “they’re still losing money every quarter,” said Brian Boero, CEO of 1000 Watt, a marketing agency focused on real estate. “At some point if I’m an investor, I want to know it makes more money than it spends,” added DelPrete.

2. There’s a bit of a web traffic slowdown. Zillow’s web traffic may be growing — but it’s moving far more slowly than last year. During the second quarter, the average number of unique visitors jumped 6 percent to 178 million. That’s a far cry from the 20 percent growth seen during the prior-year period, suggesting that “the company’s forward runway may be more limited than previously thought,” wrote Shyam Patil, an analyst at SIG, in an Aug. 9 report. “We’ve always known, of course, that… there is some cap to what a reasonable number of unique users are,” Rascoff said during the quarterly earnings call. “What has always mattered… to our business results has been commissions that we can generate.”

3. Litigious rivals. Zillow’s stock looks low compared to a high point reached in June, when the stock popped after a $130 million settlement with Move Inc., operator of Realtor.com.  Back in 2015, Move alleged that two former executives, who defected to Zillow, stole trade secrets and then destroyed evidence to cover up their actions. Including legal fees, the suit was estimated to cost Zillow $62 million — giving investors a reason to cheer in June when they could finally see the dispute in the rearview mirror.

4. OMG, CFPB. Zillow has been in hot water with the Consumer Financial Protection Bureau over a co-marketing program between brokers and mortgage lenders. Following a two-year investigation, Zillow is expected to settle with the CFPB or face litigation. During an Aug. 8 call, CFO Kathleen Philips assured investors that the program is legal and stressed that it accounts for only a “small part of our revenue.” But analysts told a different story. Patil estimated that the co-marketing program could represent “at least” 10 percent of Zillow’s revenue. “Conduct based remedies (not a fine) represent the biggest risk to the company,” he wrote Aug. 9.

5. Hello, scary neighbor! E-commerce colossus Amazon may be gunning for Zillow’s agent-referral business. Jeff Bezos’s company teased a new service dubbed “Hire a Realtor” on July 12, prompting Zillow’s stock to fall around 5 percent — dropping below its 50-day average for the first time since April.  How the competition plays out remains to be seen, but given Zillow’s $7.13 billion market cap, competition from a $460.7 billion rival is a terrifying prospect. Not surprisingly, Rascoff tried to downplay the threat on Aug. 8. “We sell an ad product that connects the consumer with a real estate professional. That’s very different from Amazon’s rumored directory of real estate agents,” he said. A lead generation tool “will always be more attractive to an advertiser than a branding ad product or a product that tries to drive traffic to their websites,” he said.

6. And can we talk about the self-proclaimed “Amazon of real estate,” better known as Redfin? RBS analysts said one of Zillow’s key challenges is keeping up its advertising growth as “competitors take a larger share of the market.” In July, Redfin pulled off a successful IPO, and raised $138 million in a public offering that valued the company at $1.73 billion. “The Redfin IPO serves as a reminder of the massive opportunity in U.S. residential real estate, but Redfin is a brokerage and Zillow Group is a media company,” Rascoff said Aug. 8. Not so fast, said John Campbell, an analyst with Stephens Inc. According to Campbell, the industry may reject Zillow’s attempt to portray itself as a partner to brokers — especially given that “a large faction of the industry has viewed (and many likely still do view) Zillow as the leader of the LT tech disruption. Will it shake out as an enemy of my enemy is my friend-type of development?” Campbell wondered.

7. There’s trouble in the Big Apple. StreetEasy, Zillow’s big bet on New York, has faced major backlash from residential agents and brokerages over attempts to make monetize its platform in New York City. Those efforts included the roll out of Zillow’s controversial Premier Agent program in March, followed by a $3 fee for rental listings in July. In August, StreetEasy said it wouldn’t take listings from the Real Estate Board of New York’s new syndicated feed. AIM Group’s DelPrete said New York was the latest battleground for ongoing tension between Zillow and brokers. Each time the company raises costs for agents, it runs the risk of alienating agents and losing market share. “The amount of backlash Zillow is facing in New York seems to be the biggest, strongest, most concerted battle against Zillow that I’ve seen,” he said. That begs the question, he added, “Have they pissed off the industry too much and will it come back to bite them?” For what it’s worth, a team of analysts at Deutsche Bank thinks StreetEasy can make up to $86 million in New York over the next two years on its Premier Agent program.