If you wanted a look at a company for which everything was going its way, take a look at Zillow (NASDAQ:ZG). The company posted some incredible new revenue figures, and made it pretty clear that next quarter was looking bright as well. Some of the causes behind those gains will likely be apparent immediately, but with the company up over 8% in pre-market trading and showing little sign of slowing, getting the full understanding behind these gains will prove valuable.
So Suddenly People Want Real Estate
Zillow turned in an absolutely monster quarter, with third-quarter earnings per share (EPS) figures coming in at $0.37 after a few adjustments were made. Analysts were expecting less than a third of that figure, coming in at $0.11. Revenue was likewise a beat, as the company brought in $657 million as opposed to the expected $572 million.
Zillow's projections for the next quarter weren't half bad either, with expectations of $709 million to $748 million for the quarter. Anything in that range, even the lowest end, will still readily beat the expected revenue of $683 million.
The company made its biggest gains in the mortgage unit, with revenue increasing more than double—114% at last report—to hit $54 million. Zillow stepped into a large amount of refinancing activity that came amid bottom-tier interest rates, which also helped fuel new interest in buying homes in general. In a noteworthy side point, the company is also currently carrying the highest cash and investments balance that it's ever seen, going from $3.5 billion in the second quarter to $3.8 billion now.
Analysts Are Skeptical, but Coming Around
Here's where the picture starts getting particularly interesting. The company is currently building back its offers segment—where it would buy and sell real estate itself—after curtailing operations on that sector when COVID-19 first started cropping up. Yet despite these hefty gains and rapid changes—not to mention the fact that the company is sitting on a truly epic pile of cash right now—the analyst community consensus is that the company is still a “hold”, based on our latest research.
Granted, there have been changes on this front that suggests some minds are being changed. Three months ago, the company had two “sell” ratings, 10 “hold” and 10 “buy.” Two months later, that went to two “sell”, eight “hold”, and 13 “buy”. Now, there's one new “hold” rating.
What's more, the price target has been trending upward for the last six months; six months ago, the company had an average target of $47.53, and today, it's more than double that at $97.09. In fact, eight separate analysts issued hikes to their price targets, and some up substantially. The Royal Bank of Canada, for example, raised its analysis from “sector perform” to “outperform,” and hiked the target from $74 per share to $147. Not everyone, however, is so convinced; a week ago, Goldman Sachs lowered the target from $93 to $84, while Bank of America boosted its target from $28 to an only slightly less ludicrous $33.
Changing Conditions, Changing Values
There's no doubt that Zillow benefited from recent conditions on the ground. A combination of factors all jumped behind Zillow and gave it some monster tailwinds. The growth of everything-at-home we saw back in the second quarter and onward, some in more places than others, definitely gave Zillow a jump as people began to reconsider where they lived. Some people wanted more space in general, since they needed to spend more time in that space as opposed to just sleeping there and living their lives out in the real world. Others wanted safer places, lower costs, or both and plotted to leave the cities they were in for safer and cheaper destinations.
With the election still somewhat up in the air, it's unclear just how many of those factors will still be in play even three months from now. However, it's a safe bet that the people who used Zillow to find a new home this time around will likely come back next time, meaning that Zillow may come out of this with customers for life.
The urgency of moving out of a current location may have been curtailed, but Zillow will still be connecting home buyers to available properties for some time to come. With the kind of cash Zillow has behind it right now, it may be in a good position to actually own a lot of those properties itself, and benefit from their sale accordingly.
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