Story Stocks^®

Zillow (ZG) seems to be getting back on investors' radar screens as it trades to a new 52-week high today. With the Fed poised to lower rates this week by at least 25 basis points and possibly 50 bps, investors seem to be betting that lower rates will rejuvenate what has been a moribund housing market. And especially by next spring's key selling season, rates are likely to be lower and this should benefit Zillow.

• Home prices have been rising despite rising rates because there has been little supply on the market. Homeowners with 3% mortgage rates have not wanted to give up those low rates to move into a new home with a higher rate. As a result, many people have decided to stay put in their current home and make due. However, with rates on the decline, it is reasonable to believe that many homeowners will finally decide to move and that is great news for Zillow.
• Zillow has not performed well in recent years. Its share price fell in the 2021-22 time period. We think the company overstepped when it got into the business of buying and renovating homes then selling them. At the time, Briefing.com made the joke that Zillow was becoming a REIT. We have always seen Zillow's core competency as an online marketplace for homes and that is where is business should stay. Also, buying and renovating homes threw off its financials because the entire sale price was then included in revenue. As a result, its Homes segment dwarfed its other segments, which became obscured. To Zillow's credit, it exited the Homes business fairly quickly.
• Also, Zillow has been focusing on improving its core areas. Its Residential segment, which focuses on partnering with realtors and listing homes for sale, has benefited from investments in top- and mid-funnel experiences that are driving improvements in overall connection rates. Zillow has also been integrating its touring technology into its buyer flow process and it has been a hit with customers. Zillow says touring is meaningfully improving its ability to identify high-intent customers.
• While Residential is by far Zillow's largest segment, the company has leaned hard into adjacent areas like rentals and purchase mortgage opportunities. Zillow's Rentals segment now represents 20% of total revenue and is growing rapidly. In Q2, Rentals revenue grew 29% yr/yr to $117 mln, primarily driven by multifamily revenue, which grew 44% yr/yr.

Overall, we think Zillow is a name to keep on the radar. With rates likely to be lower by next spring, that could spur movement in the housing space. There also is likely some pent up demand from people who have wanted to move in recent years, but rates get them locked in their homes. But now the calculus is changing and they may make a move. Also, the rental market has been a strong area for Zillow. Plus, Zillow has a new CEO with Jeremy Wacksman recently being promoted from COO to CEO. All in all, investors are taking a fresh look at Zillow.