Zillow, We Have a Problem

Zillow Chief Executive Rich Barton doesn’t think small. In a conference call for investors Wednesday, he likened the company’s disruption of the real estate industry to landing the first man on the moon.

Zillow is still grounded, though. The real estate giant delivered a mixed second quarter update, sending its stock tumbling. Revenue for its new Homes segment edged Wall Street’s estimates, while Premier Agent and Mortgage revenue arrived in line with expectations.

Guidance for the third quarter was disconcerting, though, with losses in the Homes business expected to accelerate. The forecast for the Internet, Media & Technology segment, which includes the legacy Premier Agent business, was also tepid.

Zillow said in February that it was shifting its business model to buying and selling homes. Zillow’s stock was up 64% as of Wednesday’s close, reflecting investors’ enthusiasm about the company’s prospects in the automated “iBuying” process, but shares were down more than 16% as of mid-day trading on Thursday. Concerns over the path to profitability have grown. While Zillow said it expects to earn 4 to 5 percentage points before interest expense per home on iBuying, Wednesday’s news that losses would grow raised doubts.

There are other concerns, too. Agent churn within Zillow’s Premier Agent business has been unsettling, although the company said Wednesday that advertiser retention has stabilized. Zillow has been introducing a new monetization model for the business in select markets, where agents pay only once a transaction has closed on leads generated through Zillow rather than on upfront impressions. While this may draw and retain more agents, Zillow said the deferred revenue will weigh on near-term profit. Given uncertainty around profitability in the Homes business, consistent performance in this legacy business is crucial.

Zillow has high hopes for a metamorphosis, including rapid growth not only in actual home transactions but in adjacent services like mortgage origination, title and escrow. And while the iBuying opportunity is undeniably massive—just 1% of market transactions today would translate to a $20 billion business, according to Zillow—competition is fierce.

Investors will need to see more stability before they’re over the moon.

Write to Laura Forman at laura.forman@wsj.com

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