Some real estate agents choose to “invest” in Zillow by becoming a Zillow Preferred Agent. Some agents (and non-agents too) prefer to invest in Zillow by buying stock in the publicly company traded company.
We’ve discussed here before some of the pros and cons of investing in Zillow as a Preferred Agent so let’s today discuss some of the pros and cons of investing in Zillow as a company.
David Butler, a stock analyst with Seeking Alpha, has done extensive research and thinking about Zillow as a company. Here are a few things he’s been passing along about Zillow to current and potential shareholders in the company.
Zillow as a company recently released its Q1 2018 results. Trading at approximately $54/share, the company’s revenue stream has increased $1B. Not bad, right? The majority of this 22% increase in revenues y/y comes from its Premier Agent accounts with almost $213M coming from just this one category. In fact, the number of agents show spend +$5,000/month on Zillow to get their names out there as Premier Agents grew by a whopping 58%. And the number of agents who signed up to be Zillow Premier Agents for two years or more grew by 38%!
Simultaneously, Zillow’s revenue growth has been plagued with “incessant” and higher losses. Founded some 8 years ago, the company has yet to turn a profit. In fact, Zillow lost more money Q1 2018 (-$18.59M) than it lost last year…4 times its loss of $4.6M last year and long term debt of $389M
Now, add on Zillow’s latest business iteration, flipping houses.
You as real estate agents know that house flipping is a tricky business. The margins are low and the risks are high. House flipping involves more debt, large scale financing and lots of contractors to fix everything that needs fixing in the to-be-flipped house. And, fixing to-be-flipped houses takes, on average, six months in which translates into increasing debt while not producing any income.
Remember here that Zillow’s business model is replicable. Redfin’s doing it and, by the way, Redfin is also not “making” any money because it, like Zillow is plagued with negative net income. RE/MAX and Keller Williams could also replicate Zillow and Redfin by not allowing their brokerages to list their houses on any other digital real estate site but their own. The only digital real estate site that is experiencing large scale revenue growth at this time is the tiny, cloud based, agent owned eXp World Holdings website.
So…what does David Butler think about investing in Zillow as a publicly traded company? He thinks it’s a “dilemma.” He thinks the company has done a great job in increasing the consumer’s exposure to wide ranging properties but he doesn’t quite understand why it’s taking so long for Zillow to become profitable. And Butler doesn’t quite understand why Zillow has chosen to add on the iBuyer aspect to the business particularly since there is an effective reality of rising interest rates…which could slow everyone’s traffic.
Butler thinks Zillow ought to focus on the profits side of its business, the Premier Agent side of the business, because “that’s where the profits are to be made. Forget everything else.” So, no, “at $54/share” plus everything else, Zillow as a stock is “not appealing.”