Zillow Stock Up 14% Today – Time to Buy Z Stock?

The price of Zillow stock is surging more than 14% this morning in pre-market stock trading action following the release of the firm’s earnings report covering the fourth quarter of the 2021 fiscal year as losses for the period were milder than analysts’ expected.

For the three months ended on 31 December, the Seattle-based real estate tech firm reported total revenues of $3.9 billion resulting in a 392% increase compared to the same period a year ago. Analysts had estimated total revenues of $3.3 billion for the quarter.

This elevated top-line figure came as a result of the unwinding of the company’s portfolio of real estate properties. Back in November, Zillow announced that it was shutting down its property-flipping business as home prices were too unpredictable and this led to too much “earnings and balance sheet volatility”.

This quarter, the firm sold $3.35 billion worth of properties compared to $304.2 million it sold back in Q4 2020. Meanwhile, the IMT segment alone reported total revenues of $483.2 million resulting in a 14% year-on-year increase.

Notably, traffic to Zillow’s mobiles apps in Q4 was flat compared to a year ago while the number of visits during the same period was up 2% compared to Q4 2020.

Zillow’s GAAP pre-tax losses landed at $259.4 million compared to an operating profit of $46 million it reported a year ago while the firm’s adjusted EBITDA swung to negative territory at minus $434,000 compared to a positive figure of $169.9 million it produced in Q4 2020.

Net losses for the period landed at $261.2 million compared to a positive figure of $46 million the firm reported a year ago. This resulted in GAAP earnings per share of minus $1.03 compared to a profit of $0.18 per share brought by Zillow in Q4 2020. On an adjusted basis, Zillow reported non-GAAP EPS of minus $0.42 compared to a $1.17 per share loss analysts had estimated for the period.

This milder-than-expected loss is perhaps the reason why Zillow stock is surging this morning.

In regards to the wind-down of the Homes Unit, Zillow’s management stated the following: “We’ve made significant progress in our efforts to wind down our iBuying business — selling homes faster than we anticipated at better unit economics than we projected”.

Zillow also set forth targets for both revenues and adjusted EBITDA margins for 2025 of $5 billion and 45% respectively along with guidance for the upcoming fiscal quarter. During the first quarter of 2022, the firm expects to produce total revenues ranging between $3.1 and $3.4 billion and positive adjusted EBITDA ranging between $124 and $174 million. These projections were mostly in line with analysts’ estimates for the period.

What could be expected from Zillow stock following the release of this quarterly report? In this article, I’ll be assessing the price action and fundamentals of this real estate software company to outline plausible scenarios for the future.

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Zillow Stock – Technical Analysis

Zillow’s decision to buy back a large portion of its outstanding shares back in December last year did not lead to a reversal of the downtrend that the stock has been experiencing since February 2021 back when it became a meme stock.

Quite the contrary, the price has kept dropping and the stock accumulates a 23.5% drop so far in 2022 – not including this morning’s uptick.

A portion of that lost territory would be recovered if Zillow’s pre-market gains spill over to the live session. However, it is uncertain if that will happen as many tech stocks have posted post-earnings jumps during extended sessions lately but have not managed to hold on to those gains during the regular session as macro conditions continue to be challenging.

This morning, the yield of 10-year US Treasury Notes is still standing above the 2% threshold and futures of the tech-heavy Nasdaq 100 index are dropping 0.8%.

From a technical perspective, only a break above the $68 level would confirm a potential full-blown trend reversal for Zillow stock.

Other than that, momentum indicators are not yet favoring a bullish outlook and it is still too early to tell if this post-earnings uptick will lead to a recovery in the stock price in the mid term.

Zillow Stock – Fundamental Analysis

The fact that losses produced by the wind-down of Zillow’s property portfolio were milder than the market had expected is quite positive and it could bring back some of the confidence that investors lost once the company made the announcement that it was terminating this operation.

By the end of this past quarter, the firm reported a stable balance sheet comprised more than $3.1 billion in cash, equivalents, and short-term investments and total inventory of $3.91 billion – homes that still need to be sold.

It would be plausible to expect that Zillow will fully get rid of these properties by the end of the next quarter. That can produce another quarterly loss similar to the one seen during these past three months and then the company can focus entirely on producing positive results out of its IMT and Mortgages segments.

In the past year, the IMT segment produced an operating income of $544.6 million while the Mortgage operation produced a loss of $51.8 million during the same period.

In 2023, when Homes revenues stop distorting the firm’s top-line performance, sales are expected to land at $2.7 billion.

If one adds this morning’s 14% uptick to the firm’s market cap, Zillow is being valued at nearly $14 billion. This results in a forward price-to-sales ratio of 5.2x based on this 2023’s forecasted top-line figure.

Using an estimated operating margin of 20% to 25% – in line with the firm’s historical figures – Zillow is being valued at around 22.2 times its forecasted operating profits for 2023. This figure is quite conservative and points to the current valuation as being either fair or relatively depressed.

Considering the company’s robust business model and brand, its sound financials, and the faster-than-expected wind-down of the Homes unit, the outlook for Zillow stock in the mid to long-term from a fundamental perspective seems bullish.

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