It has been months since Zillow Group (NASDAQ:ZG) threw in the towel with its foray into house-flipping. Yet ZG stock continues to drop. Granted, a lot of its more recent price declines may have to do with the market’s recent volatility.
Even so, some of its slide may be due to investors realizing that, without its iBuyer catalyst (more below) to move the needle, there’s no real “X-factor” to consider with this company.
Yes, it still has its main real estate listing and lead generation business. But with its main business maturing, and the possibility of the housing market slowing down? This unit isn’t going to experience the type of growth that’s still baked into Zillow’s stock price.
In time, more investors will realize that this is a company growing at a moderate pace, trading at a high-growth multiple. As this happens, you can expect it to continue to slide.
Why ZG Stock Fell Like a House of Cards
Previously, I broke down the story behind the rise and fall of Zillow Group’s iBuyer business. In a nutshell, the company, seeing the big success rivals were having in this business (which is basically house-flipping on a multi-billion dollar scale), jumped headfirst into it.
Given its success operating a real estate listing service, management was overconfident it could lock up a large share of the industry with relative ease. However, this focus on market share rather than profitability wound up being its undoing.
It paid top dollar for houses. At a time where it was a seller’s market if there ever was one. Then, the mania for housing cooled. With home prices no longer surging as quickly as they were in 2020 and 2021, the aspiring house-flipping giant found itself in a bind.
Underwater on a lion’s share of the homes it purchased, management gave up on its iBuyer strategy, taking a $550 million write-down in the process. The end of its home-flipping endeavor may have happened in an orderly fashion. But in response to this development, ZG stock fell like a house of cards.
Nothing in Store to Save the Day
Moving along with winding down the iBuyer unit, investor discussion about Zillow Group is turning back to its main business. Some bulls on the stock believe that getting back to its main business is good news for shares moving forward.
Yet while there’s nothing specifically “wrong” with its core business, like I mentioned above, it’s maturing. That’s a big reason why Zillow got into the iBuyer business in the first place: growth was decelerating. It needed to do something to kick it back into high gear.
Of course, that game plan is now off the table. The problem? There’s nothing in store to replace it. Right now, bulls on the stock are hoping that its moderate level of revenue growth, plus a move to positive earnings this year, and a big jump in earnings in 2023, will enable ZG stock to make a comeback.
While this may be possible, keep in mind that there’s high uncertainty over the strength of the real estate market over the next two years. The pandemic-era boost in demand for housing is fading. Add in other negative factors like rising interest rates, and it’s also possible that Zillow’s main business falls short of expectations.
Bottom Line on ZG Stock
It may be a lot cheaper now than it was a year ago. Yet don’t take that to mean Zillow shares are undervalued. At today’s prices (around $48 per share), it trades for 41.8x projected 2022 earnings. The market continues to price this as if it’s set to see its revenue/earnings growth at a much faster rate than we’ll likely see.
Perhaps at some point, Zillow’s management will bring out a new game plan. Perhaps a move into a high-growth area that compliments its main business, and is less capital-intensive. Having said that, you shouldn’t buy the stock, just on the possibility that it decides to go this route.
Like I’ve argued before, I have little faith in this company’s leadership. Unfortunately, there hasn’t been any sort of shake-up in the C-suite, despite the iBuyer debacle. It appears unlikely that this management team will get the company out of its current slump.
Earning an “F” rating in my Portfolio Grader, take a pass on ZG stock. It may be putting past mistakes behind it. But until it has something for investors to look forward to, there’s not much reason to believe it’s likely to start bouncing back in price.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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