Zillow Group's (ZG 1.71%)(Z 1.82%) core Premier Agent business, which connects real estate agents with potential home buyers, is seeing a huge revenue and profit acceleration. This comes on the heels of sharp declines in those metrics that began in March during the early days of the COVID-19 crisis in the U.S. Here's the situation.
The early days of COVID-19
In early March, Zillow's site traffic was growing at a healthy, low double-digit percentage pace. However, as the initial pandemic-driven economic shutdowns and shelter-in-place mandates took hold, traffic declined. According to a March 23 investor update, it was down by almost 20% year over year.
At the time, things looked dire for the real estate market and for Zillow. During that March 23 investor call, management discussed the company's liquidity position in detail and how it would fare in a severe downside scenario. The future looked highly uncertain, and the market had already taken notice: Zillow's stock price tanked to below $19 on an intraday basis on March 18. It had been trading at over $65 per share less than one month earlier.
Image source: Getty Images.
The rapid recovery
Since late March, the company's site traffic has rebounded faster than almost anyone expected. During the second quarter, average monthly unique users grew 12% year over year to 218 million, an all-time high. Total site visits during the quarter were almost 2.5 billion, up 14% from the year-ago quarter. Founder and CEO Rich Barton attributes the accelerating interest in Zillow to the greater amount of time most people are spending at home. On the second-quarter earnings call, Barton explained:
As I said before, I believe we are at the dawn of a great reshuffling. I'm sure I don't need to spell it out for you because we are all living it, spending an average of nine hours more per day at home. Zoom meetings are changing the way families think about space and privacy. Home offices are in high demand. Backyards are more desirable than parks and gyms. Work-from-home policies are eliminating the commute for many. There's an endless list of considerations. Millions of people are currently considering upsizing, downsizing, getting closer to family, further from the office, etc.
As a result of this new interest in real estate and the services Zillow offers, its Premier Agent business is starting to catch fire. For background, Premier Agent revenue grew just 3% last year after some management missteps in 2018, but that figure accelerated to 11% growth in the first quarter.
As the nation was beginning to recognize the magnitude of the threat it faced from COVID-19, on March 20, Zillow announced its offer of a 50% discount for its Premier Agent partners on their next monthly Zillow bills, starting on March 23 and running through April 22. But the rapid recovery in site traffic reduced the pressure on the company to continue discounting its services, and it has tapered those deals off. While Premier Agent revenue fell 17% year over year in the second quarter, that was a much better result than the 27% decline management had previously forecast.
For the third quarter, management now expects Premier Agent revenue to grow 15% year over year at the midpoint of its range due to the combination of strong site traffic growth, better monetization of buyer leads, and the roll-off of the "Better Together" discounts it had provided to agents earlier in the year. So investors have gone from expecting a 27% plunge in the second quarter to 15% growth just a few months later, and that drastic change in sentiment has contributed to the stock more than quadrupling from its March low. It's also up by more than 80% year to date as of this writing.
And profits are surging
It's not just Premier Agent revenue that's surging. Profits are rising as well due to the aggressive cost-containment efforts put in place back when things looked bleak. Zillow paused all hiring and most marketing spending, and it trimmed other discretionary spending as well. Overall, the company planned to cut 25% of its quarterly expenses compared to its 2020 budget.
The combination of the swift rebound in Premier Agent revenue and the aggressive cost-cutting has resulted in astounding profit growth. The company's adjusted EBITDA margin in its Internet, Media, and Technology segment, which is mostly the Premier Agent business, jumped to 25.6% from just 19.8% in the year-ago quarter. And management expects that metric to surge further to about 39% in the third quarter.
Zillow's core business is starting to fulfill the growth and profitability potential it has always had. Investors should be paying attention.
