Zillow (ZG) Q4 Performance: Strength in Rentals, Weakness in Home Sales Outlook Weighs on Stock

Zillow Group (ZG) experienced a sharp selloff following its fourth-quarter earnings report, as investors reacted negatively to soft Q1 guidance and concerns about a flat housing market. While the company delivered a strong revenue beat and impressive growth in its rental business, the weaker-than-expected Q1 forecast and muted housing outlook took center stage, sending shares down more than 10 percent.

Despite the negative market reaction, Zillow’s long-term trajectory remains solid, particularly as its rental segment continues to expand. However, near-term challenges in the housing market and mortgage business could limit upside potential. Below, we break down Zillow’s Q4 performance, its evolving business strategy, and the risks and opportunities ahead.

Q4: Strong Revenue and Profitability, but Future Growth Uncertainty

Zillow posted fourth-quarter revenue of $554 million, a 16.9 percent year-over-year increase, which significantly exceeded its prior guidance range of $525 million to $540 million. Adjusted EBITDA surged 62 percent to $112 million, again well ahead of the $90 million to $105 million guidance range. While these figures highlight strong execution and profitability, the market was more focused on what lies ahead rather than past performance.

The primary issue driving the stock lower was the company’s weak Q1 revenue guidance, which came in below expectations. Zillow expects a flatter housing market in early 2025, which could lead to a decline in home sales volume, offsetting some of the progress the company has made in other areas.

Adding to the market's disappointment, Zillow acknowledged that some of its Q4 outperformance was driven by pulling forward a number of mortgage loan closings into December, which likely impacted January results. This suggests that Q4's upside was partially artificial, raising concerns about future momentum.

Zillow’s Strategic Shift: Rentals and Mortgages Drive Growth

A key takeaway from Zillow’s earnings report was the company’s strategic shift toward a more diversified revenue structure. Zillow has reorganized its business into two main segments:

- For Sale (which includes revenue from home sales and mortgages)

- Rentals (which includes multi-family and single-family rental listings)

The Rentals segment was a standout, growing 25 percent year-over-year to $116 million, driven primarily by a 41 percent increase in multifamily revenue. The rental market remains strong, as high mortgage rates continue to push potential homebuyers into rentals. Zillow has capitalized on this trend by expanding its Zillow Rentals Network, which now includes partnerships with Redfin, Realtor.com, Rent.com, and ApartmentGuide.com.

In contrast, the For Sale segment, which includes Zillow’s core home sales business, posted revenue growth of 15 percent to $428 million. Within this segment:

- Residential revenue rose 11 percent to $387 million, benefiting from improvements in transaction conversion rates and the expansion of Zillow Showcase.

- Mortgage revenue surged 86 percent to $41 million, driven by a 90 percent increase in purchase loan originations to $923 million.

While mortgage revenue growth was impressive, it is coming off a low base, and Zillow’s guidance suggests that higher interest rates and a slower housing market could moderate this growth in early 2025.

Q1 Guidance Disappoints: A Tougher Housing Market Looms

Zillow's Q1 guidance was the key reason for the sharp stock decline. The company expects a challenging housing market in early 2025, with home sales volume likely remaining flat compared to Q4. Zillow cited muted pending home sales trends in December and January as a leading indicator that closed transactions will be weaker in Q1.

Key forecasts from Zillow for Q1 2025 include:

- For Sale revenue growth in the mid-single digits

- Residential revenue growth in the low-to-mid single digits

- Mortgage revenue growth of approximately 30 percent

- Flat industry-wide home sales volume in Q1, which could weigh on future growth

While mortgage growth remains a bright spot, the expected slowdown in For Sale revenue and flat home sales market are raising concerns among investors. With the critical spring homebuying season approaching, Zillow will need to prove that homebuyer demand can recover despite persistent affordability challenges.

The Rental Market: A Strong Growth Driver

One of the most positive aspects of Zillow’s business model is its increasing focus on rentals, which has provided a hedge against housing market volatility. When interest rates are high, more people choose to rent rather than buy, making Zillow’s Rentals segment an increasingly important growth driver.

Zillow’s expansion into multifamily rental listings through partnerships with Redfin and other platforms strengthens its position in the rental market. As rents continue to rise and demand remains elevated, Zillow is well-positioned to capitalize on this trend and expand its share of the rental advertising market.

However, it is worth noting that while rentals provide more stable revenue growth, the core For Sale segment remains Zillow’s primary revenue driver. If home sales remain depressed for an extended period, Zillow’s overall growth could slow despite strong rental demand.

Long-Term Outlook: Is Zillow a Buy at Current Levels?

Despite the negative reaction to Zillow’s Q1 guidance, the company’s long-term fundamentals remain attractive. The expansion into mortgages and rentals, combined with its dominant market position in online real estate, gives Zillow a diversified revenue stream that should benefit from a recovery in the housing market over time.

Key reasons to remain optimistic about Zillow:

- Strong rental market growth: Zillow’s Rentals segment is expanding rapidly, and partnerships with Redfin and others should strengthen its position.

- Mortgage business momentum: While home sales may be slow in early 2025, Zillow’s mortgage segment is growing quickly, which could provide a long-term revenue boost.

- Market leadership in online real estate: Zillow remains the most recognized online real estate brand, giving it a strong competitive advantage.

However, investors should be cautious about near-term headwinds, particularly:

- A sluggish home sales market that could impact revenue growth for multiple quarters.

- High interest rates delaying homebuyer demand, keeping transaction volumes low.

- The stock's sharp drop suggests that further downside risk remains, particularly if Q1 results fail to show signs of improvement.

Conclusion: Zillow’s Mixed Outlook Requires Patience

Zillow’s Q4 results highlighted strong execution in its Rentals and Mortgage businesses, but the weak Q1 guidance and a flat home sales outlook triggered investor concern. While long-term fundamentals remain solid, the near-term housing market uncertainty will likely keep the stock under pressure.

For long-term investors, Zillow’s diversified revenue streams and dominance in online real estate make it an attractive holding. However, short-term traders may want to wait for signs of a recovery in home sales before considering a position.

Until interest rates decline and homebuyer demand rebounds, Zillow’s stock may remain volatile, requiring patience from investors looking for a sustained upside move.