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Zillow/super app: creating new businesses adds risk premium

  • February 12, 2022
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The folks at Zillow have lots of big ideas. The last — house flipping — struck out big time. Now, the online property listing company has found a new plan to lift it from the ashes of its home trading fiasco: a “housing super app”.

Details are vague. Boss Rich Barton wants to bring together “all the fragmented pieces of the moving process” on to one platform. Despite a lack of specifics, the company believes the super app can help the group deliver $5bn in revenue and a 45 per cent adjusted ebitda margin by 2025. Last year, Zillow made $8.1bn in revenue and reported an adjusted ebitda margin of just 2 per cent.

Caution is warranted. Barton has overpromised and underdelivered before. In 2018, he bullishly predicted that Zillow Offers, the company’s ill-fated homebuying unit, could generate $20bn in annual revenue by 2024 at the latest.

Instead, Zillow chose to shut down Offers last November after racking up big losses. Despite Friday’s rally — it has recently managed to sell off houses for more than expected — Zillow is worth just a quarter of its February 2021 peak.

Zillow lost an average of $27,609 for every home it flipped during the fourth quarter, including interest expenses, renovation and holdings costs. Losses at the homes division totalled $881.5mn before taxes for the whole of 2021. The group also took a chunky asset writedown, worth almost half of that, in the second half of last year. It still has 10,000 homes left in its inventory to sell off.

Zillow’s legacy property listing and advertising remains a bright spot. Sales were up 14 per cent during the fourth quarter and the business enjoys a healthy 46 per cent adjusted ebitda margin. Clearly, just having a solid roof overhead does not appeal to Zillow. Instead of creating Zillow 2.0, management should work on better stewardship of shareholders capital.

“Innovation is a bumpy road,” wrote Barton in his letter to shareholders. Perhaps. But some of that depends on who is driving.

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