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Zillow (ZG) Up 13.4% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Zillow Group (ZG). Shares have added about 13.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Zillow due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Zillow Group Q3 Earnings Beat on Higher Revenues

Zillow Group reported solid third-quarter 2023 results, wherein the bottom-line and top-line beat the respective Zacks Consensus Estimates. Higher rental revenues, greater loan origination during the quarter led to higher revenues year over year. However, volatile mortgage interest rates, home price fluctuations and low housing inventory hindered the top line growth. The buyout of Follow Up boss will boost collaboration among real estate professionals and customers. It will serve as a platform to build well organized teams, enhance client interactions and expedite deal closings.

Net Income

In the reported quarter, net loss on a GAAP basis was $28 million or a loss of 12 cents per share compared to a net loss of $53 million or 22 cents per share in the prior-year quarter. Higher net sales led to narrower loss year over year.

On a non-GAAP basis, the company’s net income stood at $83 million or 33 cents per share compared with $99 million or 38 cents per share in the year-ago quarter. Non-GAAP net income for the reported quarter beat the Zacks Consensus Estimate by 12 cents.

Revenues

Quarterly net sales aggregated $496 million compared with $483 million reported in the year-ago quarter. Declining residential revenues impeded the top line. The top line surpassed the Zacks consensus estimate of $484 million.

Residential revenues were $362 million, down 3% year over year from $372 million reported in the year-ago quarter. Net sales from this vertical surpassed the Zacks consensus estimate of $357.97 million. Despite the year over year decline net sales came at the higher end of the management’s expectations. Faster than industry growth of premier agent partners connections is a positive. The company’s continuous efforts to improve customer funnel, better align with evolving customer demand supported the top line.

Rental revenues in the quarter improved by 34% year over year to $99 million. Segment top line beat the Zacks consensus estimate of $87.57 million. The uptick was driven by growth in both multi and single-family listings.

Net sales from Mortgage segment registered a net sale of $24 million down 8% year over year. Increasing interest rates negatively affected the revenues from this vertical. However, a staggering 88% growth in loan origination volume partially reversed the declining trends.

Other Details

Gross profit during the quarter stood at $386 million compared with $394 million in the prior-year quarter. The decline was primarily due to higher cost of revenues induced by website building costs and development of new products. Operating expenses during the quarter were $439 million, down from $445 million in the year-ago quarter. Adjusted EBITDA was $107 million, down from $130 million in the prior-year quarter with respective margins of 22% and 27%. Despite the year-over-year decline, adjusted EBITDA figure was above the midpoint of the company guidance backed by higher revenues and better cost management.

Cash Flow & Liquidity

Zillow Group generated $268 million in cash from operating activities in the first nine months of 2023 compared with $4,420 million in the prior-year period. As of Sep 30, 2023, the company had $1,846 million in cash and cash equivalents with $119 million of lease liabilities, net of current portion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -21.08% due to these changes.

VGM Scores

At this time, Zillow has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Zillow has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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