Searching home prices on Zillow Group Inc. (NASDAQ: ZG) has become a bit of a national pastime, especially since home values have soared over the last few years. The Zillow app is sort of like Google for real estate, allowing prospective buyers and sellers to search through their markets and compare home prices. Additionally, the company offers resources and tools like affordability calculators to help users make the best possible decisions for listing or purchasing property. All these features are delivered free of charge.
Of course, no company operates out of the goodness of their heart, and Zillow has several different ways of producing revenue. The first revenue stream is the most obvious — good old-fashioned website advertising. But Zillow has also actively entered the real estate market as a buyer, seller and lender. The company buys and sells its own homes to clients, offers mortgage and lending services and allows local real estate agents to list profiles to enhance their personal brands.
Zillow operates a number of sub-brands, including popular home and apartment aggregators Trulia and HotPads. In 2021, Zillow produced its highest annual revenue total ever at $8.1 billion but remained unprofitable with a net loss of $527 million.
How Zillow Makes Money
Zillow might seem like Google for real estate, but the company’s infrastructure is a bit more complex than just advertising sales. The Zillow Group has three main avenues of producing income, although one of these is about to be wound down in the near future. Its three revenue streams are:
Internet, Media and Technology
Website advertising makes the world go around, and Zillow has a couple different ways of bringing in advertising revenue. Zillow can sell ad space on its website and apps, but it also has a program called Premier Agent for individual real estate agents. For a fee, real estate agents and small brokerage firms can create Premier Agent profiles, which give more visibility to its specific listings. Premier Agent members can also write bios, share photos and videos, and list previous sales and client reviews. The internet, media and technology (IMT) segment earned $483 million in revenue in Q4 last year, a 14% increase year-over-year.
Zillow offers mortgage origination services through its Zillow Home Loans program, usually supplying mortgages to home buyers using its app or site. Zillow also has a mortgage finder feature that allows prospective buyers to shop around for better rates. According to its disclaimer, mortgage lenders appearing in these search results are often paying fees to Zillow to receive customer information. The mortgages segment earned $51 million in revenue in Q4 last year.
Zillow has actively participated in the markets it covers, buying homes and reselling them through its soon-to-end iBuying program called Zillow Offers. Additionally, Zillow offers title and escrow services. While this branch of the company has had no problem bringing in revenue, Zillow has struggled to find a balance that makes the program profitable. The company recently announced it would be selling off its remaining supply of homes and exiting this area of the market. The homes segment produced $3.3 billion in revenue in Q4 thanks to this expedited wind down but posted a $881 million consolidated generally accepted accounting principles (GAAP) net loss in 2021.
Zillow Stock Price
Zillow has been a public company more than once in its lifetime and currently trades under two ticker symbols: ZG for the Class A shares and Z for the Class C shares. Class C shares do not have voting rights with the company. The separation of share classes came during a 2015 stock split.
Zillow Group stock price over the last 12 months (Benzinga Pro)
Where to Invest in Zillow
Both classes of Zillow shares can be found at online discount brokers and legacy firms. When choosing a broker, focus less on whether it has the shares you want — brokers offer most if not all large-cap stocks — and more on the services and platform. Look for a broker that suits your needs and investing (or trading) style.
The idea for Zillow began as the dot-com bubble was finally deflating. Stanford graduates Richard Barton and Lloyd Frink co-founded the travel search site Expedia while working for Microsoft. Seeing that the mortgage and real estate industry was primed for disruption, Barton envisioned a search aggregator for users to compare home values and get the best possible information when looking for a new place to live. The website went live in 2006, and the company went public in summer of 2011. With its proprietary algorithm — the Zestimate — it helps customers calculate home values. Zillow began buying homes outright to sell in 2018.
Zillow has spent a lot of time in the headlines recently, although not for the reasons investors want to see. Shares of Zillow stock have been caught in the vicious tech selloff that began in 2021 and squelched the gains of many of the COVID-19 pandemic’s biggest winners. Zillow shares declined nearly 75% between February of 2021 and February of 2022, a brutal drawdown despite record-setting home prices and a hot domestic market.
The closure of the iBuying program raised some eyebrows too as Zillow announced massive losses in its attempt to buy and sell homes under its own umbrella. The company’s next earnings report is scheduled for May of 2022 with analysts projecting an earnings-per-share (EPS) range from 13 to 42 cents.
Zillow’s future prospects could improve as the company exits its deeply unprofitable iBuying program and focuses more on mortgages and other revenue sources. The company has a directory of information on more than 100 million homes in the United States, which is the type of database any online real estate broker or search aggregator can only dream of.
Access to a database this diverse gives Zillow a leg up on its competition, although its failure in the home-flipping segment shows that displacing real estate agents will be tougher than originally thought. Additionally, competitors like OpenDoor Technologies Inc. (NASDAQ: OPEN) and Redfin Corp. (NASDAQ: RDFN) have stepped into the ring, but they lack the deep market database and brand reliability. In the company’s Q4 conference call on February 10, CEO Barton said Zillow expects to earn more than $5 billion in annual revenue with a 45% earnings before interest, taxes, depreciation and amortization (EBITDA) margin by 2025.
Zillow: The C-Suite
Barton co-founded the company with fellow Microsoft alum Lloyd Frink in 2005. As the former creator of Expedia, Barton had unique experience building search features and felt the real estate industry was ripe for disruption. Barton was the initial Zillow Group CEO until 2010 and then returned to the role in 2019. He currently sits on the board of Netflix Inc. (NASDAQ: NFLX), Artsy and Qurate Retail Inc. (NASDAQ: QRTEA).
Frink founded the company with Barton in 2005, having previously worked alongside Barton at Microsoft and then Expedia. Frink works in product development and technological innovation as chairman and president of Zillow Group.
Parker joined Zillow Group in 2018 after previous stints with Amazon.com Inc. (NASDAQ: AMZN), General Electric Co. (NYSE: GE) and Trane Residential Systems, owned by Trane Technologies (NYSE: TT). Parker holds a certification from GE’s renowned Global Business Management course and received his degree in accounting from the University of Oregon. With over three decades of experience in professional finance roles, Parker oversees Zillow’s accounting, legal and treasury departments.
Frequently Asked Questions
What is Zillow’s business strategy?
Zillow seeks to streamline the real estate buying process by providing reliable information on home values and tools to help prospective users make the best decisions. The company uses its proprietary Zestimate formula to aggregate home prices and link buyers with local real estate agents. Zillow also offers mortgage origination services and brand-development tools for agents with its Premier Agent program.
How does Zillow calculate home values?
Zillow’s proprietary Zestimate formula is used to determine home prices on the company’s website and app. The Zestimate pulls data from a variety of public sources such as tax records, property records, recent area home sales and user data to give an accurate estimate. Note that the Zestimate is an educated guess and not a substitute to an actual appraisal of the property. However, Zillow claims its Zestimate has a median error rate of just under 2%.
How did Zillow lose money flipping houses?
Zillow’s high-profile exit from the home-flipping industry was a bit of a surprise announcement, given the hot housing market and sturdy credit of prospective buyers. But while Zillow’s website contains fairly accurate data about the current price of homes and real estate, the Zillow Offers iBuying program failed to accurately calculate future home prices. As a result, many of the homes purchased by Zillow Offers were sold for less than they were acquired for.