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Earnings Results: Zillow predicts its first $2 billion quarter and blows away earnings expectations, but stock sinks

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Zillow Group Inc. on Thursday forecast large growth in its newer home-flipping business and its first $2 billion quarter of sales, but the costs of that effort seem to be cutting into profit and hurting the stock.

Zillow
ZG,
-0.12%

reported second-quarter earnings of $9.6 million, or 4 cents a share, on revenue of $1.31 billion, up from sales of $768 million in the same quarter a year ago, when the COVID-19 pandemic wreaked havoc on many companies’ finances. After adjusting for stock-based compensation and other costs, Zillow reported earnings of 44 cents a share, after posting an adjusted loss of 17 cents a share last year.

Analysts on average expected adjusted earnings of 24 cents a share on sales of $1.28 billion, according to FactSet. Shares fell about 3% in after-hours trading immediately following the release of the results, after closing the day’s session with a 0.1% decrease to $110.30.

Zillow offers consumers a website with real-estate information, and has a paying program for real-estate professionals, which are wrapped into the company’s Internet, Media & Technology, or IMT segment. Zillow reported revenue of $476.1 million for the IMT segment, up from $280 million a year ago, and $348.8 million for its core Premier Agent offering for professionals, up from $192 million; analysts on average expected IMT revenue of $467 million and Premier Agent sales of $345 million, according to FactSet.

“The U.S. housing market remained strong throughout Q2 thanks to the combination of increased remote work flexibility, relatively low interest rates, and another quarter of limited housing supply, and these factors likely contributed to continued strength for Zillow’s core Premier Agent business,” Canaccord Genuity analysts wrote in a preview of the results this week.

Zillow has also launched businesses in recent years that buy and sell houses, called Zillow Offers, and service mortgages. The Homes segment, which includes Zillow Offers and related businesses, reported revenue of $777.1 million, up from $454.3 million in the same quarter last year, while the Mortgages segment recorded sales of $56.7 million, up from $33.8 million. Analysts on average expected Homes revenue of $751 million and Mortgages revenue of $62 million, according to FactSet.

For the third quarter, Zillow executives expect revenue of $1.93 billion to $2.05 billion, blowing away the average analyst estimate of $1.45 billion, according to FactSet. The forecast calls for $1.4 billion to $1.5 billion from the Homes segment, $472 million to $485 million from the IMT segment, and $55 million $62 million from Mortgages.

The biggest difference between analysts’ estimates and Zillow’s forecast was expected huge growth in Zillow Offers. Analysts were projecting revenue of about $900 million for the Homes segment, while Zillow shot way beyond that.

“This guidance reflects a step up in purchase activity and accelerated investments to build scale, resulting from the progress we have made in strengthening our pricing models,” executives said when discussing the guidance in a letter to shareholders released Thursday afternoon. “Automation at the top of the funnel will help drive scalability and improved customer experience for future periods.”

The spending required for that growth could be cutting into potential profits, though. Zillow predicted adjusted Ebitda of $94 million to $126 million for the third quarter, which would be a sharp drop from the $183 million reported in the second quarter.

“We expect consolidated adjusted EBITDA to be lower than Q2 as we accelerate investments across our people, our technology and development efforts, and our sales and marketing costs,” executives wrote in their letter.

Executives are expected to host a conference call at 5 p.m. Eastern to discuss the results further.

“Investors will be looking for an update on Zillow’s efforts to expand the number of home services it offers, along with how homeowners are engaging with the new feature allowing them to use their Zestimate as a live cash offer for their home,” the Canaccord Genuity analysts wrote, while maintaining a Buy rating and $220 price target on the stock.

Zillow stock exploded to a new high of more than $200 a share in February, but has cooled off quickly. So far this year, shares have declined 18.8% overall, while the S&P 500 index
SPX,
+0.60%

has gained 17.2% in that time.

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