Buy the Dip? Zillow’s Profit Comeback Meets Market Pressure
Zillow Group Inc. (NASDAQ: ZG) is on track for its first profitable year since 2012. The company has cited increased revenue from its mortgage business and a focus on closely managing headcount as reasons for the spike in profitability. However, the real estate technology company may still need some help, in the form of lower interest rates, to reverse the bearish momentum from recent events.
On the strength of its second-quarter earnings report, ZG stock climbed about 10% to reach its 52-week high in early September, leading many business services stocks. However, the stock has dropped about 20% since that time.
One reason may be simple profit taking. Investors who bought the dip in ZG stock in April were rewarded with a gain of about 47%.
But the bigger catalyst for the recent pullback may be regulatory. At the beginning of October, Zillow and Redfin were sued by the U.S. Federal Trade Commission (FTC) over claims that the two companies entered into an unlawful agreement that removed Redfin from advertising rental housing on internet listing services.
The commission believes the “partnership” between the companies is a way for Zillow to avoid competing head-to-head with Redfin, which could result in higher prices for consumers. It’s too early to forecast what penalty, if any, will be imposed. But it’s still enough for investors to sell the news and lock in prior gains.
Nevertheless, the company’s fundamentals are mostly favorable, but there are some areas of concern. That’s why Zillow may need to see further movement in the housing market before investors can consider the stock a buy.
Zillow Strengthens Its Real Estate Platform with AI and Mortgage Growth
Zillow’s real estate super app connects buyers and sellers with agents. In October, the company’s app became the only one to integrate with ChatGPT. This offers users a first-of-its-kind experience that works seamlessly with the Zillow app.
However, the company also operates as a mortgage lender through its Zillow Loans program. In its most recent quarter, Zillow cited a 41% year-over-year increase in mortgage revenue. This was due in large part to a 48% increase in purchase loan origination volume, which reached $1.1 billion.
This may seem surprising due to the overall weakness in the housing market. However, a report from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development (HUD) reported that new single-home family sales surged in August to an adjusted annual rate of 80,000, a 15% YOY increase.
This is where Zillow is showing strength. The company’s focus on Enhanced Markets connects high-intent movers in select markets with high-performing professionals to deliver a more integrated transaction. In other words, while the overall number of home buyers may be down, Zillow is more efficiently and effectively capturing the ones that are buying.
Is Now the Time to Buy Zillow Stock After the Pullback?
After the pullback, ZG stock is trading about 19% below its consensus price target, which is above its 52-week high. Notably, several analysts rate the stock above the consensus target. It’s also interesting to see that Zillow’s projected 12-month earnings growth of around 234% is higher than the company’s forward price-to-earnings (P/E) ratio of around 216x.
However, efficiency will only take the company so far. The FTC lawsuit is likely to cause earnings concerns. Plus, the company remains at the mercy of a frozen housing market that shows no signs of thawing on a grand scale anytime soon.
The fundamentals suggest this could be a buyable dip. But the chart suggests that the bottom may not be in yet. There is persistent bearish momentum, with the latest closing price being well below the mid-point and lower Bollinger Bands, and close to a support level at $66.47. Volume is also looking bearish with elevated volume days in favor of the sellers.
Investors considering getting involved should watch the relative strength indicator (RSI). It's around 32 right now, which is approaching oversold territory. That means there could still be some selling to come, with the next support zone at a significantly lower price, possibly around the April lows.
