March Shows iBuying Theme Is Strong and Lumpy
Zillow’s March results reveal the near-term business is doing better than planned, and the long-term opportunity is intact. That said, the timing of getting the iBuying flywheel up to speed is lumpy. This lumpiness comes in the form of an expected decline in Zillow’s iBuying segment in June, followed by an expected step up in the September quarter. In the end, we believe Zillow will get its Offers business right, work through the inventory bottleneck, and be a winner in the iBuying trend. Loup is an investor in Zillow.
Revenue came in 9% better than consensus. While all three segments exceeded expectations, the Homes (iBuying) segment was the biggest driver of upside, coming in 12% better than the Street. On the profitability side, IMT margin was 46.7% versus consensus at 42%. The company continues to dominate the top of the real estate search funnel, with average monthly unique users up 15% y/y to 221m, vs. 16% in December.
June outlook reveals a lumpy reality
The stock would be up more if not for June revenue guidance being 4% below expectations. The biggest driver of lower guidance is related to the Homes segment. The good news is Zillow sold about 15% more homes than they expected in March, and the bad news is the company has not been able to purchase homes fast enough to grow inventory. We believe the reason for the air-pocket in Zillow home inventory is that its offers over the past two months have failed to keep pace with a record appreciation in home prices. Simply put, for better or worse, it appears Zillow was making conservative offers.
Growing inventory fast enough to keep the flywheel going
The core question is whether Zillow can buy enough homes at the right price in an intensely competitive environment in order to satisfy the growing consumer demand for iBuying. On the earnings call, the company commented that Zillow Offers’ top of the funnel interest is expanding, with record levels of inquiries from sellers in recent weeks. This increase in inquiries lines up with the company rolling out the live Zestimate over the past couple of months. The unknown is whether these inquiries will be met with an offer that satisfies the seller.
Intense competition is the key risk
We believe it’s a function of time before iBuying’s share of the US residential real estate market increases from less than 1% today to 10% plus in the future. In the near term, we think the key risk to achieving greater share is the increased competition to buy homes, both from other iBuyers and consumers, which could result in Zillow stretching its buy box at the risk of crimping profitability. Conversely, there is a risk that the company maintains an overly conservative bidding approach, in order to maintain near-term home buying profitability, and is unsuccessful at acquiring enough inventory to grow. In the end, price matters for home sellers and we believe Zillow will make the proper adjustments and rebuild inventory by the September quarter.