Guggenheim Says Zillow's Home Segment Off To 'Strong Start' In 2019

Zillow Group Inc (NASDAQ: ZG) started a new business unit called Home, which actively buys homes with the purpose of remodeling them and flipping the home for a profit.

The Analyst

Guggenheim Partners' Jake Fuller maintains a Neutral rating on Zillow with no price target.

The Thesis

Guggenheim's checks and surveys suggests the real estate database company bought 249 homes across the small handful of markets it operates in through Feb. 9, Fuller said in a research report. Checks so far point to 73 homes successfully sold over the same time period and another 36 homes show a pending contract to sell. As such, the company could guide its first-quarter revenue for the business to be more than $60 million if not close to $70 million.

Since the launch of the Homes business, the analyst's checks found 245 sales with an average price tag of $300,422 versus an average cost to buy of $292,943. Assuming an average seller fee of 8 percent and an average appreciation in value of 2.6 percent, the company likely recorded an average profit per home of around $31,000. However, this is unlikely to be large enough for the company to fully cover all of its costs, including renovation, financing and commission costs.

The Home segment is showing encouraging traction so far but any visibility towards long-term profits is "murky," the analyst wrote.

Price Action

Shares of Zillow closed Wednesday's session at $34.90, down 3.6 percent.

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