The Real Deal New York

Poof! Zillow’s market cap drops $2B amid stock sell-off

Share price dropped 20% after dismal earnings Nov. 6
By E.B. Solomont | November 07, 2018 11:36AM

Zillow CEO Spencer Rascoff (Credit: Getty Images and iStock)

UPDATED, Nov. 7, 6:40 p.m.: On the heels of dismal earnings on Tuesday, Zillow Group is getting pummeled on Wall Street.

Overnight, the Seattle-based listing giant lost nearly a quarter of its market cap — now $6.3 billion, down from $8.2 billion — as its stock plummeted 20 percent. Shares of Zillow opened today at $29.99 per share, down from yesterday‘s closing price of $40.74 per share.

Within hours of the market opening Wednesday, investors were frantically buying and selling shares. As of 11 a.m., Zillow’s trading volume hit 21.8 million —roughly nine times its average trading volume of 2.4 million. Meanwhile, several Wall Street banks lowered their price estimates for Zillow, which said yesterday that revenue from Premier Agent fell short of expectations because of recent changes to the lucrative-but-controversial agent advertising program.

“We were surprised by the magnitude of the slowdown,” Deutsche Bank analyst Lloyd Walmsley wrote in a Nov. 7 research note. Although “the company seems to be nimbly addressing” the issues, he said, “with no clear indication of how 2019 will shape up … it makes it tough for us to have a positive view on next year.”

On Wednesday, investment banking firm Stifel lowered its price target for Zillow to $34 from $40 — a 15 percent drop.

“Although management is confident updates addressing agents’ concerns can remediate these issues, we remain cautious on the growth of Zillow’s core business over the intermediate term,” analyst John Egbert wrote in a note explaining the investment rationale.

On Tuesday, Zillow said Premier Agent revenue was lower than expected after agents protested recent changes to the program. In April, Zillow began vetting prospective buyers and handing off live leads by phone. But that meant agents were getting around four leads per month instead of 10. In New York, LG Fairmont — a firm whose business model is based on buying leads — stopped advertising on Zillow altogether, as The Real Deal reported.

Nearly 70 percent of Zillow’s revenue comes from Premier Agent, which pulled in $232.7 million during the quarter, up 18 percent though short of its target of $237 million to $239 million. “Regardless of lead quality, many agents tell us that they also value a higher quantity of leads,” CEO Spencer Rascoff conceded during an earnings call Tuesday. He detailed several changes Zillow has already made to solve some of the pain points, adding that “Premier Agent issues are very solvable.”

For example, Rascoff said Zillow is now capping the lead price in some ZIP codes to improve the return on investment, and it will change screening questions for buyers to give agents more leads.

But analyst Bradley Bening of Carig-Hallum Capital Group noted that it “will take time and evidence to regain investor confidence.” And Tom White, an analyst at D.A. Davidson, said that “at best,” improved revenue from Premier Agent wasn’t likely until 2019.

“For shorter-term investors, [Zillow] seems to have a lot on its plate,” he wrote in a Nov. 7 note. “Two consecutive quarters of lowered guidance will not instill confidence around execution.”

Beyond Premier Agent woes, some analysts believe Zillow is also falling victim to a slowing housing market. Brent Thill, an analyst at Jefferies, pointed out that it’s the third time Zillow has lowered its guidance for the year. “The results underscore the fact that [Zillow] is not immune to the challenged macro environment within U.S. real estate,” he wrote in a research note.

Some believe Zillow may have too much on its plate given the market headwinds. The listings giant just completed its acquisition of Mortgage Lenders of America, and earlier this year it waded into the home-flipping business.

Mark Mahaney at RBC Capital Markets said the Premier Agent churn coincides with Zillow taking a big risk by getting into the iBuyer business, although the segment is, in his words, “exploding.” But in a research note he cautioned: “We believe Zillow has many of the competencies to succeed in this market, but it’s unclear if it has all of them.”

During the third quarter, Zillow said its “Homes” segment, which includes Zillow Offers, generated $11 million in revenue after buying 168 homes and selling 36.

“Homes is growing extremely quickly,” said Rascoff, who added that in October Zillow bought 130 homes and sold 32. “We’re now doing in a month what we basically did in all of Q3, and soon we’ll be doing in a week what we did in all of Q3.”

But Deutsche Bank’s Walmsley wasn’t as bullish. In a Nov. 5 note, before the company reported its earnings, he wrote that he thinks Zillow’s Homes team “still lacks software necessary to scale up as quickly as the company originally hoped.”

Given that and other headwinds, analysts wrote, “We are biased to assume more negative surprises given the magnitude of new initiatives underway at Zillow.”

Update: The stock price and trading numbers in this story were updated to reflect where they landed at market close on Nov. 7.