Zillow reports its December quarter on Wednesday, February 10th.
We believe Zillow is one of two companies (along with Opendoor) best positioned to disrupt residential real estate. Our opinion is that over the next 5 years, Zillow and Opendoor can each be 3x the market cap they are today. Here’s some context for Zillow’s quarter:
- Zillow’s recent research forecasts 6.9m homes sales in 2021, up 22% from an estimated 5.7m sales in 2020. Additionally, Zillow expects a 10% pricing increase this year, at the high end of most estimates. Freddie Mac is expecting homes sales to be flat in 2021. Housing inventory is low across the country, but the velocity of transactions is important to watch. Tech is enabling faster property discovery and lowering the home time on market. In the end, home sales can increase even in a tight inventory environment.
- EBITDA Margins for Zillow’s IMT ad business segment surprised on the upside last quarter. At that time, the company guided that they’ll be investing in the business and they expect those margins to decline over time. Analysts are expecting it to continue with high-40% margins, while company guidance is for 44% in the December quarter. If they beat the EBIDTA number, keep in mind it’s likely not sustainable. If they miss that number, we shouldn’t be surprised, given on the last earnings call the company said it’s “planning to accelerate investments in December.”
- Homes segment, or Zillow Offers, is the segment we’re most excited about long term. The company gave December Homes revenue guidance of $260m to $280m. Assuming an average sale price of about $315,000 per home, this implies around 845 home sales in the quarter. While still significantly depressed from Dec-19 when Zillow did 1,902 home sales, it’s a step up from the Sep-20 quarter which saw 583 home sales. The company is still ramping its home purchases and sales after a multi-month pause during the pandemic. Keep in mind this number is nascent today compared to the ~5.5m homes sold annually in the US. In other words, we’re not going to get too excited or disappointed if the number falls slightly outside of this range. The reason is because there’s still a lot of pandemic noise in home buying and selling decisions.