Coronavirus could be fatal to real estate companies such as Zillow Group (NASDAQ: ZG).
Zillow makes money by selling real estate data. However, Zillow estimates U.S. home sales could fall by 60% because of COVID-19.
Strangely, Zillow projects home prices will fall by only 2% to 3%. Personally, I think Zillow’s estimates do not add up. I cannot see how home prices will not fall by far over 2% or 3% if the 60% claim is true.
In detail, Zillow claims US pending home sales fell by 50% in the first two quarters of 2020. However, Zillow claims pending home sales could recover to 97% of the fourth quarter 2019 levels by end of 2021.
Coronavirus will Get Worse
I think Zillow’s projections are flawed because they assume coronavirus will not get worse. Unfortunately, some epidemiologists disagree with Zillow’s optimism.
A University of Minnesota study predicts a worse second wave of coronavirus in fall and winter of 2020, USA Today reports. Center for Infectious Disease Research and Policy (CIDRAP) scientists based their claims on a study of the 1918 Great Influenza, America’s last pandemic.
The CIDRAP scientists think the pandemic will last until 60% to 70% of the population is immune to COVID-19. The CIDRAP experts think developing such immunity will take 18 to 24 months.*
I think a second wave of coronavirus will lead to another 60% drop in home sales. Moreover, I believe a second coronavirus wave will cause home and real estate prices to drop by 30% to 60%.
Hence, coronavirus could destroy the real estate business and the source of Zillow’s revenues. Therefore, both the real estate market and Zillow could collapse.
Mr. Maket Overvalues Zillow
I think Mr. Market grossly overvalued Zillow Group Inc. (NASDAQ: ZG) at $60.99 on 9 June 2020.
Strangely, Mr. Market has been kind to Zillow in 2020. Zillow started 2020 at $45 on 2 January 2020, rose to $65.49 on 21 February 2020, and fell to $23.51 on 18 March 2020. However, Zillow recovered to $59.52 on 7 June 2020 to $60.99 on 9 June 2020 .
I think America’s imbecilic faith in real estate’s ability to keep its value drives Zillow’s share price. However, Zillow’s own data shows this faith is naïve and stupid. If home sales can fall by 60%, then home prices could fall by 60%.
Is Zillow Making Money?
Strangely, Zillow’s revenues grew in the first quarter of 2020. Zillow reported quarterly revenues of $943.95 million on 31 December 2019 and $1.126 billion on 31 March 2020.
Moreover, Zillow reported a quarterly gross profit on $334.33 million on 31 December 2019 to $364.15 million three months later. In contrast’s, Zillow’s operating loss grew from $-73.77 million on 31 December 2019 to -$144.50 million on 31 March 2020.
In addition, Zillow’s common net loss grew from -$101.20 million on 31 December 2019 to -$163.27 million on 31 March 2020. Conversely, Zillow’s quarterly cash flow grew from $58.11 million on 31 December 2019 to $301.99 million on 31 March 2020.
Zillow is a Cash-Rich Company
Strangely, Zillow is a cash-rich company. Zillow’s ending cash grew from -$635.01 million on 31 December 2019 to $1.624 billion on 31 March 2020. Plus, Zillow’s cash and short-term investments grew from $2.512 billion on 31 December 2019 to $2.617 billion on March 31, 2020.
Zillow’s cash flow is growing, but I cannot see how that cash flow will keep growing if the real estate market collapses. However, if I am wrong, Zillow will be in a splendid position to cash in.
Therefore, buying Zillow stock is a bet that the coronavirus pandemic will end soon. If the pandemic continues, however, Zillow will collapse. I suspect the pandemic will continue for at least a few years.
Can Zillow Survive?
However, there is a possibility that Zillow could survive the pandemic by spending its cash or selling debt.
Notably, the U.S. Federal Reserve is buying corporate debt through exchange-traded funds (ETFs), The New York Times reports. Hence, Zillow could issue enough debt to survive and hope the Fed will buy that debt.
Beyond debt, Zillow could sell itself to another company; such as Alphabet (NASDAQ: GOOG). Remember, Zillow has some valuable data collection capabilities. However, it is unclear what those capabilities will be worth in a real estate collapse?
I think Zillow (NASDAQ: ZG) is a risky speculative investment everybody needs to avoid. Only optimists who think coronavirus will end fast and the real estate market will recover need to buy Zillow. I advise everybody else to sell Zillow fast because ZG will collapse fast when housing collapses.
Originally published at https://marketmadhouse.com on June 9, 2020.