Zillow shares fall after forecasting home-flipping losses

Zillow Group shares fell as much as 14% in aftermarket trading after the company forecast that its new home-flipping business would lose as much as $80 million in the third quarter before interest, taxes, depreciation and amortization.

Overall, the home-search company is projecting third-quarter adjusted Ebitda between an $18 million loss and a $2 million gain. That compares with a consensus estimate of $17 million.

Key Insights

– The company generated $249 million in second-quarter revenue from Zillow Offers, an algorithm-driven spin on home-flipping, and received requests from 70,000 consumers who wanted to sell their homes to Zillow over the internet.

– Chief Executive Officer Rich Barton said in an interview that revenue growth from Zillow Offers shows that the business is working. “It’s being driven by people who want an easy, convenient, hassle-free way to sell a home,” he said. “We’re far from being at what I would call scale. I’m confident that when we do get to scale we will be able to do 400 to 500 basis points of profit off this business.”

– Going forward, Zillow will need to show that it can turn a profit in the capital intensive, low-margin business of flipping homes. Consumers are willing to sell their homes at a small discount in exchange for the speed and certainty of selling their home over the internet. When fees rise too far beyond what traditional brokers charge, sellers return to the old methods. Zillow reported a $56.5 million loss before interest, taxes, depreciation and amortization in its Homes segment, which includes Zillow Offers.

– Zillow shares had increased by 45% since its last earnings report in May through the close of trading today, when the company’s better-than-expected revenue from Zillow Offers highlighted the benefits to the company’s ongoing transformation. Those results, combined with co-founder Barton’s return to the role of chief executive officer, have gotten a lot of attention. Perhaps more importantly, real estate agents have stopped defecting from its advertising platform.

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