Zillow Boosts Share Repurchase by $750 Million – Buyback Wednesdays

The rapid rise in mortgage rates in 2022 and this year caused a ripple effect that impacted numerous real estate tech companies. The sudden change in the macro environment compelled companies to swiftly implement cost-cutting strategies, including workforce reductions and alterations to their business strategies. Notably, prominent players such as Zillow Group (Z) and Redfin Corporation (RDFN) were not immune to this downturn and faced substantial adverse consequences, particularly in terms of their growth trajectories.

Key Insights:

• Zillow, the real estate marketplace that connected buyers or renters with realtors made an ill fated turn into home flipping (iBuying).
• Founder Rich Barton returned to the company as CEO and oversaw the company’s exit from the iBuying business right before the market collapsed.
• Despite a challenging macro environment, the company continues to demonstrate strong performance and execution in terms of cash flows.
• In a surprising move the company decided to recently partner with rival Redfin, which had its own ill fated adventures with iBuying.
• There is a lot of upside potential once interest rates cool down or new housing supply hits the market to reduce pressure on prices.

ZILLOW BRANDS

Seattle-based Zillow Group Inc (Z) offers a range of information and services related to selling, buying, renting, and financing properties. The company was founded by Rich Barton, who serves as its current CEO. Barton’s inspiration for Zillow came during his time at Microsoft (MSFT), where he previously founded Expedia.com within Microsoft. Drawing parallels to the transformation brought by Expedia to the travel industry, Barton believed that a similar approach could revolutionize the real estate sector. As a result, Zillow’s website was officially launched on February 8, 2006.

With shares trading at approximately $56.78, Zillow has a market cap of $13.22 billion and an enterprise value of $11.52 billion on account of net cash on the balance sheet.

Share Repurchase:

On August 2, 2023, Zillow announced that its Board has approved an additional $750 million capital repurchase authorization, taking the total available authorization to just over $1 billion, including $264 million remaining under its existing authorization.

Zillow’s commitment to share repurchases has been notable. Since the initiation of its buyback program in late 2021, the company has authorized the repurchase of shares worth $2.5 billion, of which it has already successfully repurchased $1.5 billion worth of shares. This strategy has led to a reduction of approximately 12% in the company’s outstanding shares since March 2022, effectively lowering the total share count from 265.95 million to 234.43 million by March 2023.

Speaking about equal distribution of cash across its various strategies, CFO Jeremy Hofmann mentioned:

“Going forward, we will continue to carry some cash for risk management purposes, some cash for potential inorganic and organic investment dry powder and opportunistically consider share repurchases from operating cash flow.”

Acquisitions:

Zillow has pursued a strategy of significant acquisitions, aimed at enhancing its services and offerings to its customer base.

• The journey began in 2011 with Zillow’s acquisition of Postlets, a digital platform focused on real estate listings and distribution. This marked Zillow’s initial foray into using acquisitions to grow.
• Subsequently, Zillow engaged in a series of acquisitions within the online real estate sector. In 2012, it acquired Rentjuice and Hotpads, followed by the purchase of StreetEasy in 2013. One of its landmark acquisitions took place in 2015 when Zillow acquired Trulia, a significant competitor, in a substantial $2.5 billion transaction. This move was particularly noteworthy as it consolidated Zillow and Trulia’s dominance in online real estate searches, accounting for 70 percent of such searches. In the same year, Zillow also added Dotloop to its portfolio, a software solution aiding real estate brokerages in digital document management.

ZILLOW REAL ESTATE SOFTWARE

• The company’s expansion continued in 2016 with the acquisition of Bridge Interactive, a service focused on listing data management.
• In a bid to extend its reach beyond the United States, Zillow partnered with Century 21 Canada in June 2018, marking the first instance of Canadian properties being listed on its platform.
• Zillow’s acquisition spree continued, with the addition of ShowingTime, a software facilitating home showings, in October 2021.
• The company rounded off its acquisitions for the year 2022 with the purchase of VRX Media in December. VRX Media specializes in real estate-focused content like aerial drone photography, virtual staging, 3D tours, and high-definition images. This acquisition marked Zillow’s 18th successful acquisition to date, underscoring the company’s commitment to expanding and diversifying its offerings in the real estate industry.

Source: Zillow – Investor Presentation (2022)

Abandoning the iBuying Business:

Zillow was early in both entering and exiting the iBuying market, which allows companies to buy homes directly from sellers. The business supercharged revenue growth but left little in terms of profits. Remarkably it accounted for over 60% of the total revenue generated at one point. However, as the landscape evolved, Zillow’s iBuying venture encountered challenges, particularly in the face of escalating interest rates and a decline in home prices.

Recognizing the problems of this business model, Zillow opted to discontinue its iBuying operations, choosing instead to redirect its focus towards its core real estate ad and data sales business. The company refers to this business as its Internet, Media and Technology (IMT) division. Investors were relieved because the iBuying business was dragging down overall company margins and had transformed Zillow from an asset-light software business to a low margin (or no margin) asset-heavy business.

Redfin, similarly initially benefitted from the iBuying model as it helped the company rapidly increase revenue in a market that was rewarding revenue growth above all else. RedfinNow, a prominent component of Redfin’s operations, contributed substantially to its Q3 2022 revenues by selling 530 homes at an average price of $550,903. Redfin came to the same conclusion as Zillow and ultimately decided to divest from its iBuying business but did so much later than Zillow and as a result suffered steeper losses.

Zillow Partners With Redfin:

In a highly unusual move, Zillow and Redfin partnered last year on sharing 3D home tours and interactive floor plans. Recently, on August 1, 2023, they announced a rare syndication partnership related to the sharing of new construction listings.

According to Zillow, it has the largest selection of new-construction communities of all real estate websites in the U.S., including on its “Zillow Community” pages. Those listings will now automatically show up in Redfin search results, beginning in the fourth quarter of 2023.

Sounding optimistic about this partnership, Zillow spokesperson Emily McDonald said,

“We believe this partnership will benefit our entire New Construction advertising marketplace.”

Considering how many mergers and acquisitions have been challenged by the FTC and DOJ recently on antitrust grounds, it makes sense that Zillow and Redfin have chosen to collaborate instead of merging with each other.

Current Scenario:

According to the National Association of Realtors (NAR), there was a decrease in existing-home sales during June 2023, marking the 11th consecutive month of year-over-year declines. with sales showing variation across the major regions of the United States. While the Northeast saw an increase in home sales and the Midwest remained stable, both the South and West regions observed declines. All four regions registered a decrease in year-over-year sales. In June, existing-home sales went down by 3.3%, reaching a seasonally adjusted annual rate of 4.16 million. This represents an 18.9% drop in year-over-year sales compared to June 2022, when sales were at 5.13 million. This is the lowest level of existing home sales since June 2020.

Source: www.nar.realtor

While this downward trend in existing home sales has helped home builders, companies like Zillow have taken a hit.

Q2 2023 Results:

In the face of a sluggish housing market, Zillow has maintained a steady flow of organic traffic to its applications and websites. Surprisingly over 80% of Zillow’s traffic is generated organically, which shows the dominant position Zillow enjoys in what is for the most part a duopoly.

• Second-quarter revenue reached $506 million, exceeding the upper limit of its projected range by $27 million and marking a return to modestly positive year-over-year growth.
• EBITDA for the period totaled $111 million, surpassing the upper boundary of its projected range by $30 million.
• Rentals revenue grew 28% year-over-year. This growth was driven by organic efforts, signing up more multifamily properties and attracting more single-family listings.
• Rentals traffic grew 15% year-over-year to 31 million average monthly rental unique visitors per comScore.
• Residential revenue stood at $380 million, reflecting a 3% decline compared to the previous year. However, its  residential revenue performance was 1,900 basis points above the industry decline of 22%
• New construction revenue growth was also strong during Q2, increasing 18% year-over-year as customers turn to new construction homes given the limited existing home inventory.
• In the current quarter, the expense for share-based compensation amounted to $130 million, marking an increase from $103 million in the previous quarter. Around $17 million of this sequential rise can be attributed to factors such as the departure of personnel and the effects of the annual employee grants issued in March 2023. This could potentially explain the decision to expand the share repurchase authorization, which may serve as a means to counteract the dilution resulting from share-based compensation.

Zillow has a strong balance sheet with cash and short-term investments of $3.3 billion and net cash of $1.6 billion as of the end of Q2, 2023.

Outlook for Q3 2023:

Considering the upward trajectory of mortgage rates and the complex economic landscape, the company maintains a cautious and conservative outlook for the upcoming quarter.

• Total revenue is expected to be between $458 million to $486 million.
• Residential revenue is estimated to be between $339 million to $359 million, down 6% year-over-year.
• EBITDA is expected to be between $67 million to $87 million for the quarter.
• The company expects to continue to outperform the industry in Q3.

Bottom Line:

With a loyal customer base and a highly recognizable brand, Zillow remains an interesting company, especially as it readies itself for a potential rebound in the real estate sector. In the fiscal 2024, analysts are forecasting Zillow will achieve $2.16 billion in revenue, reflecting 13% year-over-year growth.

We wrote about Zillow as a spotlight idea in our October 2022 Special Situations newsletter and I concluded that article as follows:

Zillow has $1.88 billion in net cash on its balance sheet, giving it enough capital to make strategic acquisitions as competitors and weaker companies falter in this housing market downturn. Zillow and Redfin already represent a duopoly in their niche of the residential housing segment and Redfin’s decision to continue its iBuying program will leave Zillow in a stronger position to consolidate the industry.

Zillow was using their iBuying business to build an operating system for home buying and selling, which they called Zillow 360. They will still be able to build out the operating system through strategic partnerships without getting into the business of manufacturing the hardware components (iBuying, mortgages, etc.).

I have not seen Zillow dip below the $30 level except for brief periods during the depths of the pandemic and in 2018. I have held shares of Zillow for several years and it is taking all my willpower to avoid adding to my position at current levels. When the stock dropped below $30 in late 2018 both Rich Barton and Director Jay Hoag stepped in to buy shares. I am yet to see that signal after the recent drop and it is possible we will see insider purchases after Q3 2022 results are announced. I am also concerned about the length and depth of this housing downturn and don’t want to be premature about buying Zillow, at risk of losing some upside.

The stock has more than doubled since then and I regret not buying more last year. Once the current rally in growth stocks runs its course, I think we will see additional buying opportunities for Zillow in the coming months.

Welcome to edition 71 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

There has been a noticeable increase in buyback activity thanks to Q2 earnings season. Last week saw 28 companies announce buyback plans, a similar momentum compared to the prior week with 27 announcements.

Top 5 Stock Buyback Announcements 

1. Nano Dimension Ltd. (NNDM): $2.95

On August 7, 2023, the Board of Directors of this  additive manufacturing technology company. authorised a new $227.5 million share repurchase program, equal to around 30% of its market cap at announcement.

2. Equillium, Inc. (EQ): $0.77

On August 2, 2023, the Board of Directors of this biotechnology company approved a new $7.5 million share repurchase program, equal to around 29.1% of its market cap at announcement.

3. Flex Ltd. (FLEX): $27.53

 On August 7, 2023, the Board of Directors of this technology and manufacturing solutions provider authorized a new $2 billion share repurchase program, equal to around 16.3% of its market cap at announcement.

4. Carlisle Companies Incorporated (CSL): $285.11

 On August 3, 2023, the Board of Directors of this manufacturer of engineered products authorized an additional 7.5 million share repurchase program, equal to around 15% of its market cap at announcement.

5. Magnachip Semiconductor Corporation (MX): $9.18

 On August 7, 2023, the Board of Directors of this semiconductor manufacturer authorized a new $50 million share repurchase program, equal to around 13% of its market cap at announcement.

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