Zillow is betting big on the flipping of houses, and investors seem to like it


Zillow Group Inc. believes that "hyperbaric" consumers want to instantly buy and sell homes on their phones. Therefore, the bet is even greater on real estate purchases despite very risky forecasts.

On Thursday, Zillow

ZG, + 0.46%

said as part of its fourth-quarter results that it would invest more in its Zillow Offers service, which allows consumers to easily sell their homes to the Seattle-based company. Zillow, which has seen its stock gradually lose nearly half of its value since the launch of the service in the second quarter of 2018, also announced a reshuffling of the jobs of its three co-founders. Managing Director, Spencer Rascoff, resigned and joining the board by co-founder Rich Barton.

Zillow's shares initially fell after normal market hours, but after the company's executives predicted that Zillow Offers could add "$ 20 billion in annual revenue over the next three to five a conference call with investors, its shares rebounded jumped about 6%. On Thursday, its shares closed at $ 35.04, down about 46% from the peak of 201.5 reached $ 65.57 in July 2018.

Zillow compared his radical change of strategy to the adoption of streaming video by Netflix, while he had announced several years ago that streaming would eventually outpace his DVD rental business. Another comparison that could be made is that real estate, like content, can be very expensive in some markets.

"I see a lot of parallels here, as we take the Zillow group into the next phase of what we saw at Netflix, when we went from DVD to mail to streaming, and then to the originals," Barton told reporters. analysts during the conference call. "It's that kind of change." Barton has been on Netflix Inc.

NFLX, -0.82%

board of directors since 2002. At the end of the call, he made another analogy with Netflix. "Can you imagine if Netflix just ignored streaming? You can probably say that I am excited. I hope you too. "

The Zillow offers, officially launched in April 2018, allow homeowners who wish to sell their property to receive an offer from Zillow with an analysis of the value of their home. Zillow is looking to buy, renovate and then resell properties in 90 days or less. As part of its long-term goals, Zillow expects to be able to buy 5,000 homes a month, generate more than 3,000 monthly loans and generate $ 2 billion in annual sales, more than double its size.

But until now, its 90-day sales goals are not being met. Zillow said it has bought a total of 686 units since the launch of Zillow Offers, but has sold only 177, including 141 in the fourth quarter. Zillow Offers is available in seven markets across the country, and it is expected to be over 14 by the end of the year.

These projections are not devoid of any risk and the US real estate market, although strong in recent years, is infamous. And his actions are hardly seriously profitable, at least until now. Forbes did a quick analysis and found that out of the 141 homes sold in the fourth quarter, Zillow had only realized an average profit of $ 1,723 per house, considering the purchase costs, sales and renovation. He also has other competitors, including his competitor Redfin Corp.

RDFN, + 2.20%

RDFN, + 2.20%

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with Redfin Now.

Zillow's decision to acquire and sell real estate initially caused some concern among his core sales, real estate agents, where he derives approximately 70% of his income. Zillow said he was making key real estate partners in the process.

Ygal Arounian, an analyst at Wedbush Securities, said in a preview note of the findings that although he "likes[s] the story that Zillow is putting in place as the next stage of a real estate upheaval, "he said." Zillow is still in the early stages of this process and the risk / benefit ratio by 2019 is currently balanced. "

Another risk is the amount of debt that Zillow may have to accumulate to carry out his ambitions. The company said it now had a maximum borrowing capacity of $ 1 billion to support the rapid growth of Zillow's offerings in 2019 and beyond.

Investors may be excited about Zillow's pivotal moment at the moment, but knowing if she has the capabilities to become a real estate investor and the pinball consumer properties is a question mark that will weigh on the title until 'to the contrary.

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