Zillow Group Inc (NASDAQ:ZG) is an online real estate company created in Seattle in 2004. When the 2020 coronavirus pandemic hit, the company’s namesake platform became a hot spot for an exploding housing market. Interest rates dropped, and people in large, expensive cities moved out to the suburbs and smaller towns.
As the housing market got more competitive, Zillow’s stock soared by nearly 10x from a low of $18.65 to a high of $112.21. So, is Zillow stock overvalued?
The company generates revenue from advertising, and its stock was sliding downward in the four years preceding the pandemic. Although stock prices went up, the company cut expenses by 25 percent and froze hiring to keep up with the market.
Still, it has both for sale and rental listings for over 110 million homes in the United States and acts as a full-service real estate marketplace. While some realtors have a problem with Zillow versus the Multiple Listing Service (MLS), both buyers and sellers flock to it.
This guide will explain why Zillow’s market cap is so high in 2020 and whether it can sustain this growth. We’ll start by diving into the market conditions that drove the price up for the first time in years.
Why Zillow Stock Went Up
When the world shifted to work-from-home and home school amid the coronavirus outbreak, it created a new economy. The Federal Reserve lowered interest rates, which in turn created the lowest 30-year fixed mortgage rate on record.
People rushed to buy a home or refinance to take advantage, and it created a housing boom, specifically in what are now known as Zoom towns.
These are small towns that have little industry to support people’s career objectives, but they’re also cheaper to buy a home and can still support virtual work, like Zoom meetings.
Americans rushed to escape the crowded cities for small towns as a way to protect themselves from the virus. This drove home prices up nearly 10 percent and created a competitive market, putting Zoom front and center of a booming industry.
The most price competition is further away from city centers, as people are driven to the suburbs. However, this is all based on several government stimulus packages and orders that prevent evictions and foreclosures through the end of 2020.
These protections expire in 2021. Plus, there is only so far the government can continue carrying the economy before it needs to rebound by itself, and this could cause problems for Zillow that we’ll discuss in a moment. First, here are the company’s financials.
Zillow Financials Are Staggering
Zillow generated $768 million in revenue during the second quarter of 2020 based on 2.5 billion visits from 218 unique monthly visitors on average each month.
The company has 5,300 employees, and its main revenue is from advertising for real estate agents, home builders, and property management companies.
It’s more than just the Zillow marketplace too – the company also owns Trulia, StreetEasy, HotPads, Naked Apartments, and RealEstate.com.
The company reports that over $3.5 billion a year (and growing) is spent on real estate marketing, and it’s a major industry player.
It’s pushing to grow its online mortgage services too. Besides subscriptions and other services, this could nab the company a portion of that lucrative business.
It entered 2020 with $2.4 billion cash on hand, and it’s in the business of buying and selling homes through its Zillow Offers program.
This helped it increase revenue by 28 percent year-over-year to $768 million, with $3.5 billion cash on hand entering the second half of the year. Meanwhile, some investors worry it may not be able to sustain this higher market value.
Is Zillow Valuation Too High?
Zillow has two stocks: Class A and Class C (NASDAQ:Z), with Class C lacking voting rights. Each is priced in the $100 range in October, giving the company a market cap comfortably over $20 billion.
It dropped with the market from late February through March, but it soon experienced massive gains, getting Wall Street buzzing.
Home prices are continuing to rise, as housing demand is still accelerated through the end of the year. This puts more money in the pockets of realtors and homebuilders who need to continue competing for their share of the market.
However, Zillow isn’t alone in its quest – Redfin, Homesnap, and others offer a different user experience that could dig into some of the company’s profits. Offering full-suite services also puts it somewhat in competition with its own customer base too.
As the company grows revenues through its buying programs, it starts to cannibalize its own customers, which could cause its main advertising revenue to go down.
There’s also no telling what will happen to the housing market when government protections run out at the end of 2020.
Will Zillow Stock Drop?
The U.S. Department of Housing and Urban Development (HUD) and Federal Housing Financing Agency (FHFA) provided a foreclosure and eviction moratorium in the aftermath of the Covid-19 pandemic.
This created somewhat of an artificial housing market, and it’s not entirely clear if the bubble will pop over the next five years.
Even commercial real estate took a hit, as major brick-and-mortar businesses had to stall rent payments to afford employee paychecks and other expenses.
It’s possible that Zillow will have issues maintaining if the housing market gets worse once these moratoriums expire. The rental market is also stagnant in many markets, and the prevalence of virtual school means some younger generations could live with their parents longer.
Competition in the market could get bought out by competitors with more spending cash to put obstacles in the company’s way.
Is Zillow Stock Overvalued? The Bottom Line
Zillow is one of the biggest names in online real estate, and it saw a major boom during the coronavirus pandemic. The shift to virtual work and school changed the way people look at buying, selling, and renting homes.
While lower interest rates are causing bidding wars that raise housing prices, it’s occurring largely in rural areas away from city centers. The company benefited from this shift, but it doesn’t mean it’s out of the woods yet.
It’s facing stiff competition from more players, and government stimulus funds are running out soon. Zillow is also cannibalizing its own customer base in an attempt to open new revenue streams by being more involved in the homebuying process.
These moves could pay off on Amazon levels, but it could also cause the company to lose to a competitor. Invest with caution.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.