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Market Cap: $11.92B
Enterprise Value: $10.30B
Key Insights:
Company Profile
Seattle-based Zillow Group Inc. (Z) provides comprehensive services for selling, buying, renting, and financing properties. Founded by Rich Barton, Zillow was inspired by Barton’s experience at Microsoft (MSFT), where he founded Expedia.com. Barton saw an opportunity to apply a similar transformative approach to real estate as Expedia had done for travel, leading to the launch of Zillow on February 8, 2006.
Planned Transition
On August 7, 2024, Zillow Group (Z, ZG) announced the promotion of longtime executive and Chief Operating Officer Jeremy Wacksman to the role of Chief Executive Officer and the company’s Board of Directors. Mr. Wacksman takes over from co-founder Rich Barton, who will continue on the Zillow Group Board as co-executive chair alongside fellow co-founder and current Executive Chair Lloyd Frink.
Rich Barton – Founder
We have written about Zillow (ZG) several times in the past including our October 2022 Special Situations newsletter I also held a position in the company for several years in the past.
I wrote the following about the company and Rich Barton in that October 2022 newsletter:
Rich Barton was a General Manager at Microsoft in the 1990s when he pitched the idea for a travel website to Bill Gates and Steve Ballmer. Expedia was founded inside Microsoft and later spun off as a separate company with Mr. Barton as CEO. The company went public in 1999 and was acquired by IAC in 2003 for $3.64 billion. This was not the only billion dollar company that Rich Barton founded. A few years after the sale of Expedia to IAC, he went on to found Zillow. If founding two large companies within a decade was not enough, he went on to also co-found Glassdoor in 2007.
He served as Zillow’s CEO through 2010 and then took on the role of Executive Chairman until February 2019 when he once again stepped into the role of CEO. He was a venture partner at the VC firm Benchmark until 2018 and currently serves on the boards of Netflix, Qurate Retail and Artsy. Zillow entered the iBuying business before Rich Barton took over as CEO but he oversaw its expansion for the next two years before deciding to pull the plug.
Jeremy Wacksman is now Zillow’s third CEO, following Rich Barton, who previously served as CEO from the company’s founding until 2010 and then returned to the role in 2019 as the company’s shares were sinking in value.
In the Q2 2024 shareholder letter, former Zillow CEO Barton disclosed that the company had been preparing for his leadership transition for some time.
Zillow’s board approved a pay raise for Mr. Wacksman, increasing his base salary from $690,000 to $825,000, a nearly 20% increase from 2022. In 2022, his total compensation including stock options was over $14 million. Mr. Barton’s compensation last year was over $26 million. Following the CEO announcement and Q2 earnings report, Zillow’s share price rose 12% to $45 in after-hours trading, though it is down 18% from a year ago.
However, he assumes leadership as high mortgage rates continue to dampen the housing market for existing homes.
Current Situation:
According to the National Association of Realtors, existing home sales were down 5.4% in June to a seasonally adjusted annual rate of 3.89 million. Sales also slumped 5.4% from one year ago.
The median existing-home sales price bounced 4.1% from June 2023 to $426,900 – the second straight month it reached an all-time high and the twelfth consecutive month of year-over-year price gains. The inventory of unsold existing homes rose 3.1% from the previous month to 1.32 million at the end of June, or the equivalent of 4.1 months’ supply at the current monthly sales pace.
“We’re seeing a slow shift from a seller’s market to a buyer’s market,” said NAR Chief Economist Lawrence Yun. “Homes are sitting on the market a bit longer, and sellers are receiving fewer offers. More buyers are insisting on home inspections and appraisals, and inventory is definitively rising on a national basis.”
REALTORS Confidence Index
According to the monthly REALTORS Confidence Index, properties typically remained on the market for 22 days in June, down from 24 days in May but up from 18 days in June 2023.
Mortgage Rates
According to Freddie Mac, the 30-year fixed-rate mortgage averaged 6.77% as of July 18. That’s down from 6.89% one week ago and 6.78% one year ago.
NAR Settlement
The real estate industry is also facing significant disruption due to a settlement from a lawsuit against the National Association of Realtors, which may alter the commission realtors earn on a transaction.
The lawsuits primarily focused on the practice of “tying,” where NAR members mandate that the seller’s agent determines the commission for the buyer’s agent at the time of listing a home. It restricts the buyers’ ability to negotiate fees and compels sellers to offer higher commissions to make their properties more attractive. Additionally, this practice can lead to “steering” where agents might subtly direct clients toward homes that offer higher commissions, skewing market dynamics.
In March, NAR announced a $418 million settlement. NAR has also agreed to a new rule that would require MLS participants—specifically those working with buyers—to enter into written representation agreements with their buyers.
On April 30, 2024 Zillow announced a new non-exclusive touring agreement that is valid for seven days. The agreement comes in response to the proposed NAR settlement requiring written agreements before property tours.
On August 1, 2024, NAR announced that, effective August 17, 2024, changes outlined in NAR’s Settlement Agreement regarding broker commissions will be implemented nationwide.
Under the settlement, the following practice changes will take effect:
The ruling aims to promote the negotiation of agent commissions by home buyers and sellers, challenging the prevalent 6% fee structure. It also requires buyers to pay their agent’s fees directly, rather than having them covered by the seller’s proceeds. This change may lead more buyers to forgo agents or use them only to finalizing documentation.
Jay Hoag Strikes Again With His $100M Zillow Purchase
I have also written about Jay Hoag’s insider purchases of Zillow and Netflix several times in the past and wrote the following in my book The Event-Driven Edge in Investing about Mr. Hoag’s purchase of Netflix in 2012 after the company had decided to split itself into two by spinning off its DVD by mail business into a company called Qwikster:
A little less than a year after Netflix announced its disastrous plan, in one of my regular nightly reviews, I noticed a large opportunistic purchase by an insider. A member of Netflix’s board of directors, Jay Hoag, picked up $25m worth of Netflix stock over a three-day period in May 2012.
Mr. Hoag purchased Netflix shares indirectly through Silicon Valley venture capital firm Technology Crossover Ventures (now known as TCV), a VC firm he co-founded in 1995. TCV first invested in Netflix in 1999 and then went on to invest several more times both before and after Netflix went public. Mr. Hoag joined Netflix’s board of directors in 1999, and by the time he filed the insider purchase in 2012 he had been involved with the company for 13 years. Mr. Hoag’s transaction had all the hallmarks of a high-signal insider purchase that you should look for as an investor, including:
• A long-serving board member who had seen the company navigate its way through the deep bear market in 2001–2003 and once again in 2007–2009.
• A high-growth company that made a strategic, but not fatal, mistake.
• An insider who was an independent board member with an investment background.
TCV’s Recent Insider Purchase
When I wrote about Zillow in October 2022, the stock was trading at just $28.63 after its disastrous mistake with the home flipping business that it thankfully started exiting while the housing market was still hot and interest rates were low. The sign I was looking for was an insider purchase by either Rich Barton or Jay Hoag.
We got that signal in June when Jay Hoag, through TCV, purchased nearly $100 million worth of non-voting class C shares (Z) from June 7 through June 11. The form 4 was filed on June 11th and the stock immediately jumped more than 13% the following day. The fact that the May CPI number came in lower than expected lead to expectations of one or more interest rate cuts later this year, which also helped real estate-related stocks and regional banks.
Why Class C Shares?
When I looked at the form 4 filing, I was curious to see if Mr. Hoag had purchased the class A voting shares that actually trade at a discount to the class C nonvoting shares ($46.55 for class A vs. $48 for class C) but was surprised to see that he chose to purchase the class C shares instead.
Looking at the average volume of both classes of shares and the size of his purchase, it becomes evident why he decided to buy class C shares. Daily trading volume for class C shares is often 10 times higher than class A shares and if he wanted to execute the purchase rapidly without moving the price up very much, class C shares make sense. For individual investors and smaller purchases, class A shares offer a better bet.
Macro Factors
The macro factor that has been a headwind for the company is low inventory levels of single family homes as homeowners remain reluctant to sell homes that have very low mortgage rates. With the latest CPI number, if interest rates start to drop later this year, this headwind will slowly start to ease, offsetting some of the impact from the NAR lawsuit settlement.
Profitability and Buybacks
Zillow is not profitable on a GAAP basis but has generated free cash flow of $125 million over the last four quarters. The company also generated $134 million of adjusted EBITDA in Q2 2024.
Since the fourth quarter of 2021, Zillow has repurchased a total of approximately $2 billion of stock at a weighted average price of $45.10 per share, for a total of 44 million shares and $146 million aggregate principal amount of convertible senior notes. Zillow has $381 million remaining under its repurchase authorization as of June 13, 2024.
Earnings Call Highlights
Risks
Zillow Group Reports Second-Quarter 2024 Financial Results (Press Release) (Shareholder Letter)
Q2 revenue: $572 million, up 13% year-over-year, exceeding the midpoint of the outlook by $39 million.
Net loss (GAAP): $17 million.
Q2 Adjusted EBITDA: $134 million (23% of total revenue), $41 million above the outlook midpoint, primarily due to higher Residential revenue.
Cash and investments: $2.6 billion at the end of Q2, down from $2.9 billion in Q1 2024.
Traffic: 231 million average monthly unique users (flat YoY); 2.5 billion visits in Q2, up 4% YoY.
Valuation
The company’s financial performance shows revenue fluctuations within a narrow range. In the last 1 year, the stock is down by 5.78%. The company has a market cap of $12.30 billion, and an enterprise value of $11.48 billion, including $823 million in net cash. The forward P/E ratio is 40.30.
Balance Sheet and Cash Flow Summary
Cash and investments stood at $2.6 billion at the end of Q2, down from $2.9 billion at the close of Q1 2024. While net cash from operating activities was positive, it was offset by $88 million in repurchases of convertible senior notes due in 2025 and $292 million in share buybacks at a weighted average price of $42.34. As of Q2’s end, outstanding convertible debt totaled $1.5 billion, with $381 million remaining under the repurchase authorization.
Outlook
The following table presents outlook for the three months ending September 30, 2024.
Conclusion
Wacksman told investors during the earnings call that “not much is going to change” under his leadership as he attempts to “scale and accelerate” the company’s growth. Since its founding, Zillow has branched out to various corners of the real estate business with varying levels of success.
Zillow’s stock rose 28.48% following the recent CEO appointment, showcasing investor optimism despite a 5.78% decline over the past year. The company’s growth strategy—focusing on enhancing touring, financing, seller solutions, and its partner network—is expected to drive revenue and EBITDA growth in early 2024. Zillow’s commitment to its “housing super app” where it participates in various segments of real estate transactions, whether it is rentals or sales, is likely to continue driving the business in a duopoly environment with Zillow and Redfin the only key players in this segment.
CEO
CFO
General Counsel
Others
Appointments
1. Starbucks Corp (SBUX): $93.90
On August 13, 2024, Starbucks announced Brian Niccol has been appointed chairman and chief executive officer. Niccol will start in his new role on September 9, 2024.
| MarketCap: $106.41B | Avg. Daily Volume (30 days): 20,624,481 | Revenue (TTM): $36.48B |
| Net Income Margin (TTM): 11.16 | ROE (TTM): -50.03% | Net Debt: $21.94B |
| P/E: 26.29 | Forward P/E: 23.58 | EV/EBIDTA (TTM): 18.12 |
| P/S (TTM): 2.94 | P/B (TTM): N/A | 52 Week Range: $70.72 – $104.78 |
2. Chipotle Mexican Grill (CMG): $51.65
On August 12, 2024, Chipotle Mexican Grill appointed Scott Boatwright as Interim Chief Executive Officer, effective immediately.
| MarketCap: $70.73B | Avg. Daily Volume (30 days): 24,016,990 | Revenue (TTM): $10.66B |
| Net Income Margin (TTM): 13.23% | ROE (TTM): 43.54% | Net Debt: $2.79B |
| P/E: 50.80 | Forward P/E: 47.62 | EV/EBIDTA (TTM): 34.33 |
| P/S (TTM): 6.69 | P/B (TTM): 19.06 | 52 Week Range: $35.37 – $69.26 |
3. Logitech International S.A. (LOGI): $88.26
On August 6, 2024, Logitech International S.A. announced that Matteo Anversa will be joining the Company as the Chief Financial Officer, effective on September 1, 2024.
| MarketCap: $13.45B | Avg. Daily Volume (30 days): 605,591 | Revenue (TTM): $4.41B |
| Net Income Margin (TTM): 15.67% | ROE (TTM): 30.89% | Net Cash: $1.46B |
| P/E: 19.94 | Forward P/E: 18.25 | EV/EBIDTA (TTM): 15.90 |
| P/S (TTM): 3.14 | P/B (TTM): 6.00 | 52 Week Range: $64.33 – $102.59 |
4. Global Payments (GPN): $105.08
On August 6, 2024, Global Payments announced that Robert Cortopassi has been appointed as President and Chief Operating Officer, effective immediately.
| MarketCap: $26.74B | Avg. Daily Volume (30 days): 2,137,714 | Revenue (TTM): $9.90B |
| Net Income Margin (TTM): 14.26% | ROE (TTM): 6.34% | Net Debt: $16.09B |
| P/E: 19.26 | Forward P/E: 9.03 | EV/EBIDTA (TTM): 10.28 |
| P/S (TTM): 2.75 | P/B (TTM): 1.19 | 52 Week Range: $91.60 – $141.13 |
5. H&R Block (HRB): $56.92
On August 5, 2024, H&R Block announced that Tiffany L. Mason has been named the company’s Chief Financial Officer, effective September 13, 2024.
| MarketCap: $7.94B | Avg. Daily Volume (30 days): 850,219 | Revenue (TTM): $3.58B |
| Net Income Margin (TTM): 17.87% | ROE (TTM): N/A | Net Debt: $1.10B |
| P/E: 13.03 | Forward P/E: 11.96 | EV/EBIDTA (TTM): 9.48 |
| P/S (TTM): 2.33 | P/B (TTM): 27.09 | 52 Week Range: $37.34 – $58.63 |
Departures
1. Starbucks Corp (SBUX): $93.90
On August 13, 2024 Starbucks announced Laxman Narasimhan is stepping down from his role as ceo and as a member of the Starbucks board with immediate effect.
| MarketCap: $106.41B | Avg. Daily Volume (30 days): 20,624,481 | Revenue (TTM): $36.48B |
| Net Income Margin (TTM): 11.16 | ROE (TTM): -50.03% | Net Debt: $21.94B |
| P/E: 26.29 | Forward P/E: 23.58 | EV/EBIDTA (TTM): 18.12 |
| P/S (TTM): 2.94 | P/B (TTM): N/A | 52 Week Range: $70.72 – $104.78 |
2. Chipotle Mexican Grill (CMG): $51.65
| MarketCap: $70.73B | Avg. Daily Volume (30 days): 24,016,990 | Revenue (TTM): $10.66B |
| Net Income Margin (TTM): 13.23% | ROE (TTM): 43.54% | Net Debt: $2.79B |
| P/E: 50.80 | Forward P/E: 47.62 | EV/EBIDTA (TTM): 34.33 |
| P/S (TTM): 6.69 | P/B (TTM): 19.06 | 52 Week Range: $35.37 – $69.26 |
3. Zillow Group (Z): $53.62
Zillow Group (Z) announced Zillow Group co-founder Richard N. Barton, who has served as Zillow Group’s Chief Executive Officer since 2019 steps down effective August 7, 2024.
Mr. Barton will remain on the Board and become Co-Executive Chairman of the Board.
| MarketCap: $12.30B | Avg. Daily Volume (30 days): 4,355,476 | Revenue (TTM): $2.07B |
| Net Income Margin (TTM): -6.81% | ROE (TTM):-3.14% | Net Cash: $823M |
| P/E: N/A | Forward P/E: 52.08 | EV/EBIDTA (TTM): -85.67 |
| P/S (TTM): 6.05 | P/B (TTM): 2.76 | 52 Week Range: 33.80 – $61.13 |
4. Unity Software (U): $15.82
On August 5, 2024, Unity Software and Luis Visoso, the company’s Executive Vice President and Chief Financial Officer, agreed to enter into a mutual separation agreement effective August 9, 2024.
| MarketCap: $6.28B | Avg. Daily Volume (30 days): 11,643,773 | Revenue (TTM): $2.06B |
| Net Income Margin (TTM): -38.46% | ROE (TTM): -22.49% | Net Debt: $1.10B |
| P/E: N/A | Forward P/E: N/A | EV/EBIDTA (TTM): -27.78 |
| P/S (TTM): 2.96 | P/B (TTM): 1.97 | 52 Week Range: $13.90 – $43.54 |
5. Yum China Holdings (YUMC): $33.20
| MarketCap: $12.79B | Avg. Daily Volume (30 days): 2,985,867 | Revenue (TTM): $11.04B |
| Net Income Margin (TTM): 7.61% | ROE (TTM): 13.27% | Net Debt: $N/A |
| P/E: 16.06 | Forward P/E: 15.75 | EV/EBIDTA (TTM): 8.55 |
| P/S (TTM): 1.22 | P/B (TTM): 2.19 | 52 Week Range: $28.50 – $57.56 |
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