Zillow (ZG)

Online real estate marketplace Zillow (NASDAQ:ZG) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 13% year on year to $598 million. Its GAAP profit of $0.03 per share was significantly above analysts’ consensus estimates.

Company Overview

Founded by Expedia co-founders Lloyd Frink and Rich Barton, Zillow (NASDAQ:ZG) is the leading U.S. online real estate marketplace.

Technology has been a double-edged sword in real estate services. On the one hand, internet listings are effective at disseminating information far and wide, casting a wide net for buyers and sellers to increase the chances of transactions. On the other hand, digitization in the real estate market could potentially disintermediate key players like agents who use information asymmetries to their advantage.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Zillow’s demand was weak and its revenue declined by 7.6% per year. This was below our standards and is a sign of lacking business quality.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Zillow’s annualized revenue growth of 10.4% over the last two years is above its five-year trend, but we were still disappointed by the results.

This quarter, Zillow reported year-on-year revenue growth of 13%, and its $598 million of revenue exceeded Wall Street’s estimates by 1.4%.

Looking ahead, sell-side analysts expect revenue to grow 14.4% over the next 12 months, an improvement versus the last two years. This projection is above average for the sector and suggests its newer products and services will fuel better top-line performance.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Zillow’s operating margin has been trending up over the last 12 months, but it still averaged negative 10% over the last two years. This is due to its large expense base and inefficient cost structure.

In Q1, Zillow generated a negative 1.5% operating margin. The company's consistent lack of profits raise a flag.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Although Zillow’s full-year earnings are still negative, it reduced its losses and improved its EPS by 28.9% annually over the last five years. The next few quarters will be critical for assessing its long-term profitability.

In Q1, Zillow reported EPS at $0.03, up from negative $0.10 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street is optimistic. Analysts forecast Zillow’s full-year EPS of negative $0.34 will reach break even.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Zillow has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 11.8% over the last two years, slightly better than the broader consumer discretionary sector.

Zillow’s free cash flow clocked in at $68 million in Q1, equivalent to a 11.4% margin. This result was good as its margin was 3.6 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

Over the next year, analysts predict Zillow’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 13.5% for the last 12 months will increase to 20%, it options for capital deployment (investments, share buybacks, etc.).

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Zillow’s five-year average ROIC was negative 2.5%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Zillow is a well-capitalized company with $1.60 billion of cash and $687 million of debt on its balance sheet. This $916 million net cash position is 5.7% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Zillow blew past analysts’ EPS and EBITDA expectations this quarter. We were also happy its revenue outperformed Wall Street’s estimates. On the other hand, its EBITDA guidance for next quarter (disclosed on the earnings call) missed. Zooming out, we think this quarter featured some important positives, but the outlook is driving the move. Shares traded down 5.1% to $62.96 after reporting.

Updated: May 16, 2025 at 10:21 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Zillow, you should also grasp the company’s longer-term business quality and valuation.

Zillow falls short of our quality standards. To begin with, its revenue has declined over the last five years. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its operating margins reveal poor profitability compared to other consumer discretionary companies.

Zillow’s P/E ratio based on the next 12 months is 36.5x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find better investment opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $79.78 on the company (compared to the current share price of $67.06).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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