Zillow (Z) is up a staggering 17% in after-hours trading (at the time of writing) after reporting its first-quarter 2019 results. The bump seems related mainly to Zillow reporting a 51% increase in revenue. At the same time, the real estate company reported a wider loss than in the same period last year.
I've been continually critical of Zillow's valuation vs. its actual financial losses. Because of the continued disparity between sales revenue and the lack of meaningful earnings derived from it, I remain conflicted on the stock. Down the road, it seems that Zillow will have quite a bit of revenue to derive profits from. Right now, they're just creating so many expenses in the process.
The company reported a loss of $67.52 million vs. a loss of $18.59 million for the period ending March 31, 2018. Zillow's losses break down to $0.33 per share. That's a 230% deterioration from last years' losses of $0.10 per share. On the other hand, revenue increased to $454 million compared to $299.8 million in the first quarter of 2018. This continues to be the story for Zillow -- ever-rising revenue streams with ever-rising costs that eat away at the company's ability to show profit.
Nevertheless, trading seems to imply that investors are elated at the fact that the company beat estimates of $432.1 million in revenue, and $0.34 per share in losses. I have a hard time gauging the company's spending right now, as they're working very hard to ramp up their home buying business. "Zillow Offers" is the company's attempt to get into the business of buying and selling houses themselves, rather than serve solely as an intermediary service for realtors looking to advertise online.
Wall Street seems to have a plethora of opinions on this initiative, as it is far more time consuming and capital intensive. If the company can prove that they're able to do it efficiently and properly, it could be a really big deal. But there are an unending number of competitors in that business, and I wonder if Zillow is wholeheartedly prepared for the gruelling process of buying and flipping homes. So far, it seems to be costing them a lot.
The thing that really gets me about Zillow, along with many tech-based companies, is that they never take the time to make one initiative profitable, before jumping into the next foray. We see all this revenue coming in from their premier realtor services, and yet Zillow has never monetized it. They've yet to show us meaningful annual earnings, and have relied on stock dilution and debt financing in order to keep scaling the business.
At the end of December, Zillow had nearly $700 million in long-term debt. If the losses continue, I feel that the number will only increase. As the number of shares outstanding continues to grow as the company raises capital, shareholders are seeing more and more dilution. While the long-term endgame might yield earnings results that make the dilution a mute point, it makes it hard to see the stock going on any big sustained bull runs in the near future (aside from short-term earnings jolts).
At $39.81 a share, Zillow is trading in the same range it was back in 2015. I was right about the stock last July, when it cratered from highs in the $50 range. The fallout was not because of weak business. The fallout was because of a disconnect between the stock price and the actual value it should carry. That's an inherent problem with many tech companies that create large gains at an unprofitable rate.
To really own Zillow right now, you have to 100% believe in the long-term ability of the company to not only scale itself into profitability, but also to outperform the competition. Zillow is bringing its buy/sell segment to multiple new cities over the next year. It will undoubtedly increase revenue further, but it will also most certainly drive up spending. I can only rate Zillow as a "hold" at best right now. The stock is simply far too expensive when you consider how much they still have to do. In doing so, I think stock dilution and/or expanding debts will continue to build.