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Zillow Idea Proposal (ZG)

Zillow Idea Proposal (ZG)
 

Is Zillow’s Instant Offers on track to become the company’s next growth story or is it detracting from the core Premier Agent business?

Report Available: October 24, 2018

 

Blueshift’s initial research found ZG expanding its Instant Offers program beyond Phoenix and Las Vegas to Atlanta and Denver despite the program having posted zero revenue in Q2. ZG also acquired a mortgage company in June to originate home loans across all its programs, but especially in the home buying and selling program where it hopes access to financing will speed transactions. ZG’s new business initiative, which moves it from an asset-light to asset-heavy business model, is a work in progress. This program is being closely monitored to see if it is truly ZG’s next growth opportunity or a drain on the company’s primary revenue stream, Premier Agents, which generates 75% of ZG’s revenue through advertising and services.

 

Observations

  1. ZG reported Q2 earnings above expectations while revenue growth of 21.9% was just short. The company reported a net loss of $3 million. ZG lowered its full-year guidance in part because of the slow start of its Instant Offers business, part of its new Homes segment which reported zero revenue for Q2 as the company said the buying and selling process is taking longer than anticipated. This segment is now projected to bring in $2 million to $7 million in Q3 revenue with full-year guidance of $20 million to $40 million, both lower than previously estimated. ZG now expects to hold 300 to 550 homes in this segment, down from 300 to 1,000 homes. The lowered guidance and disappointing results for Instant Offers spooked investors, leading to a 16% one-day decline for ZG, the most since November 2011.
  2. Despite the slow ramp of the Las Vegas and Phoenix Instant Offers program, ZG is moving into new markets. This summer ZG announced that Atlanta and Denver real estate markets would become the third and fourth locations for Instant Offers. ZG said there has been strong interest from home sellers in the Las Vegas and Phoenix markets who want more control, convenience – and less stress – in real estate transactions.
  3. ZG kept its expansion foot on the gas in August with the acquisition of Mortgage Lenders of America which should close in Q4. The purchase of the company will allow ZG to offer mortgage services across all of its brands and products, but more importantly it will streamline and shorten the home buying transaction for consumers participating in the Instant Offers program.
  4. As the perpetual disruptor of the real estate industry, ZG has successfully navigated the suspicion and distrust from agents and brokers to earn the respect and repeat business of its Premier Agents. ZG must now do it again as the real estate industry is resisting and distrusting of its Instant Offers program. When ZG first launched Instant Offers in 2017, 32,000 agents signed a petition against it and appealed to the National Association of Realtors to intervene. A survey of agents shortly after ZG started the Instant Offers program found that 87% thought ZG’s intention was to become a broker and 86% thought Instant Offers would not benefit consumers. With ZG’s revenue tied primarily to its Premier Agents, the company needs to be careful to not alienate its sure thing in order to venture into a new business.
  5. Blueshift’s June 7 report revealed that sources expect ZG to succeed and see continued growth in its expanded Instant Offers program and its pilot iBuyer business model in the Phoenix and Las Vegas markets. As is typically the case when a disruptor like ZG introduces a product or service, industry professionals interviewed by Blueshift Research offered mixed opinions on the company’s most recent venture. However, sources’ attitudes trended positively about its likelihood of success and the continuation of company growth. Seven of 12 sources were optimistic regarding ZG’s opportunities for success with its Instant Offers and iBuyer programs. In addition, two former employees of competitors’ iBuyer platforms said ZG has the resources to succeed if it can overcome some challenges.

 

Will ZG jeopardize its robust real estate agent advertising revenue stream with this new venture? Will Premier Agents continue to spend with ZG? Will they increase or decrease their spending with ZG? Will ZG’s buying and selling of homes add or detract from its growth trend? How will ZG’s acquisition of a mortgage company impact the real estate industry? How will the acquisition impact ZG’s bottom line? How are agents reacting to ZG’s entrance in the home buying and selling business? Will ZG’s new buying and selling of homes disrupt the real estate industry? To answer these and other questions, Blueshift will gather data and issue a market research report from independent sources in the following areas: Zillow Premier Agents, Real Estate Agency Executives, Real Estate Investors, and Industry Specialists.

 

Companies: Zillow Group Inc. (Z/ZG), Realogy Holdings Corp. (RLGY), Redfin Corp. (RDFN)

 

Research Begins: October 8, 2018

 

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