Zillow punished for new businesses, but doubles down with new acquisition

Zillow Inc. continues to expand beyond its core real-estate listing business, but it got punished Monday as its second quarter showed that those efforts are taking longer than expected, even as it doubles down with another acquisition.

On Monday, shares of Zillow tumbled 16% in after-hours trading after its earnings results were lower than expected, thanks to its new businesses, and it announced the acquisition of Mortgage Lenders of America for an undisclosed amount. Zillow’s Z, +1.01% shares are up 42% so far this year, as of the end of trading Monday, compared with the S&P 500’s SPX, +0.35% nearly 6% gain in 2018. 

Investors were a bit dismayed that the company’s new Homes business — which buys, renovates and sells homes — had zero revenue in the quarter, and that Rentals had $33.3 million in revenue, versus some expectations of $34.5 million. Other businesses reported revenue of $41.7 million, compared with estimates of around $43 million.

“When you take a step back, it probably looks challenged,” said Spencer Rascoff, chief executive of Zillow, on a post-earnings conference call when asked why two out of three businesses were underperforming. “When you dive in and focus on the particulars of each of these businesses, I think there’s good explanations of what’s happening underneath each of them, and we’re very excited about the MLOA acquisition, which we think dramatically expands the TAM [total addressable market].”

Still, analysts asked the company several questions about the Homes business, which was just launched in the second quarter, and why it was taking a bit longer than expected to begin to generate revenue, when the current real-estate market is so hot. The home-flipping process is “actually turning out to be more than a month, and that’s delaying revenue because we don’t get the keys for four, six, weeks later than we expected, and then the renovation starts later and then the relisting starts later and then the revenue generation from when we resell the home occurs later,” Rascoff said. Homeowners who sell to Zillow then need to find a new home, which often delays the closing process, he said.

In addition, the company’s core business, its premier agent listings, slowed to 4% user growth in the quarter, compared with the high teens in the year-ago period. Rascoff said he wasn’t satisfied with that. “We’re working very hard to improve that, and I think we can, especially at Trulia and HotPads, which had just OK unique user numbers this quarter.”

Company executives also touted its acquisition of Mortgage Lenders of America, a national mortgage lender, saying Zillow now has the potential to originate mortgages for its customers, which would speed up real-estate deals. “The mortgage business provides an opportunity to monetize the Zillow Offers business even further,” Rascoff said. “What we intend to do here is on a Zillow-owned home, when we’re reselling that to a consumer, we will provide mortgage origination for a home buyer of a Zillow-owned home.”

But Zillow needs to show some better results in its new businesses before investors will get on board with yet another business foray.

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