By Charley Blaine
Investing.com - Zillow Group (NASDAQ:ZG) changed CEOs on Thursday and announced it sees big things ahead for its home buying-and-selling business.
And investors were buying into the idea in a big way on Friday, with the stock up 22% on the news, approaching $43. But that's still down nearly 35% from its $65.42 peak last June.
The risks of the strategy are large, which even co-founder Rich Barton conceded. In retaking the reins from Spencer Rascoff, Barton said his challenge will be "getting investors really excited about taking this journey over the chasm with us."
In three to five years, Zillow sees itself buying and selling (after some fixing up) upwards of 5,000 homes a month, generating revenue of some $20 billion a year, which would translate into a 1.2% market share nationally, based on sales of about 5 million homes.
Plus, it will originate the mortgages to finance a third of the purchases, a whole new business.
The plan assumes a fairly affluent set of customers. The average house price looks around $333,000. At the end of the fourth quarter, the company owned 509 homes worth roughly $320,000, according to the company's fourth-quarter earnings statement. The median price for an existing home, according to the National Association of Realtors, was $247,500 in January.
The idea is to use Zillow's technology to streamline the home-buying process, right down to the closing. Zillow's online site revolutionized how agents do their business. The goal is to take the revolution to the logical conclusion.
Well and good, but so far the program, available in seven markets, is costing Zillow. It sold homes for $52.4 million and lost $62.4 million doing it. Even on an adjusted basis, where Zillow's main business generated $236 million in adjusted earnings before interest, taxes, depreciation and other charges, the homes business lost $45 million.
And even if profitable, the business of buying and selling homes is a low-margin business, around 2%. But generating home sales of $20 billion would mean a potential gross profit of $400 million -- if all goes well and business overall is stable. But as the 2008-2009 crash showed, the business can be very volatile and sales in recent months have slowed.
Zillow's revolution is generating growth. Fourth-quarter revenue was up 29% and full-year revenue of $1.3 billion was up 24% from the year-ago period. Results for the fourth quarter mostly met expectations.
Zillow was started by Barton, Rascoff and Lloyd Frink, who started Expedia (NASDAQ:EXPE), which wildly disrupted the travel business.