Zillow Group Inc. is almost done selling all the homes it bought in a flurry that led to a flameout of its iBuying business, but its plans for the future led to shares plunging in extended trading Thursday on a disappointing forecast.
on Thursday reported second-quarter earnings of $8 million, or 3 cents a share, on revenue of $1.01 billion, down from $1.31 billion in revenue a year ago. After adjusting for stock compensation and other effects, the real-estate services business reported earnings of 47 cents a share, up from 44 cents a share a year ago.
Analysts on average expected Zillow to report adjusted earnings of 35 cents a share on sales of $985 million, according to FactSet. Shares declined more than 9% in after-hours trading immediately following the release of the results Thursday, after closing with a 0.2% increase at $38.13.
Zillow is expected to continue showing large declines in revenue as it exits the iBuying business and laps the periods in which it frantically sold houses that it bought in too large a quantity and at high prices last year, an effort that included just 71 homes for sale at the end of the second quarter. For the third quarter, executives predict $431 million to $461 million in revenue, a sharp decline from $1.74 billion in the same period a year ago and well lower than analysts’ average estimates for $563 million.
Zillow executives’ plan to recover after dropping the iBuying effort revolves around building a “super app” that melds the assets of its other two segments — Internet, Media and Technology, or IMT, as well as the mortgages business — and can help buyers and sellers navigate the entire home-buying and -selling process. But they will have to do that as slumping existing-home sales and rising mortgage rates create a housing market that executives have admitted is “uncertain,” a view they clarified, and not in a very positive way, on Thursday.
“Today, homes are even harder to afford,” Zillow executives wrote in a letter to shareholders Thursday. “Rapidly rising mortgage rates have compounded the existing affordability challenges created by unprecedented home price appreciation. This has driven buyer sentiment to a 20-year low, and reduced buyer demand, which has cooled the previously red-hot seller’s market.”
“Ultimately, with all these factors combined, the housing industry saw flat year-over-year total transaction dollar volume in Q2 while various leading indicators deteriorated. Although demand indicators stabilized in July compared to June, we expect second-half 2022 total industry transaction dollar volume to meaningfullycontract year over year,” they said.
Zillow showed its hand on how it expects to accomplish the “super app” plans with two separate announcements Thursday — a multiyear partnership with iBuyer Opendoor Technologies Inc.
and a new tool that will let home shoppers browse five different markets at once.
The problem for Zillow as it tries to create its “super app” is that it depends on ad spending and other activity from real-estate professionals, who may be looking to cut their own spending as the hot pandemic-era housing market cools down. That is why RBC analysts warned last week that this could be a “back up the truck” quarter, in which Zillow executives unleash bad news and Wall Street estimates “really get reset.”
The analysts said that two-thirds of agents with whom they spoke have either cut their spending with Zillow or intend to, up from 56% in April. With the summer season ending and macroeconomic conditions trending down after months of slowdowns, the situation could get worse before it gets better.
“Quarters (plural) of declining lead volumes & conversion is finally taking its toll onagents and is producing bigger cuts than what we detected previously,” the analysts wrote, while maintaining an outperform rating but cutting their price target to $46 from $50. “We believe some [Premier Agents] didn’t necessarily cut spend through the initial 3 months of declining buyers/available home, which we think began in Feb., but the pain of that persistent trend is now into its 6th month which is yieldingthese updated findings.”
IMT segment revenue was flat at $475 million in the second quarter, missing the average analyst estimate of $482 million, and mortgages produced revenue of $29 million, down from $57 million a year ago and lower than the average analyst estimate of $36 million.
The forecast for those two segments was also lower than analysts expected. Zillow executives predicted third-quarter IMT revenue of $409 million to $434 million, while analysts on average were modeling $433 million, and mortgages revenue of $22 million to $27 million, nearly half the average analyst estimate of $45 million.
Zillow stock has declined 65.9% in the past year, as the S&P 500 index
has dropped 4.2%.