The changes being made to Zillow (ZG, Financial)’s lead-generation service could lead to improving financial performance. The company has reported positive feedback from consumers, with further refinements having the potential to encourage a larger number of users.
The company’s recently launched homebuying and selling service has proved popular. Expansion into major metropolitan areas could mean that it becomes a more important part of the business, while its focus on improving customer satisfaction may allow it to expand its already dominant position in the advertising market.
While there are concerns about the prospects for the U.S. housing market as interest rate rises may be ahead, the fall in the stock’s price of 30% in the last year versus a rise of 2% for the S&P 500 suggests it could offer investment potential.
Premier Agent
The changes being made to the company’s Premier Agent lead-generation service could boost its financial prospects. A survey conducted by the business found that 49% of consumers who submitted a request for information for a for-sale listing did not receive a reply. In response, the company now vets consumers before connecting them with a Premier Agent. Connection rates are significantly improved as the new system contacts the next available Premier Agent in an automated queue if the first agent did not answer the query.
Customer feedback on the new Premier Agent system has been positive. Home shoppers said they are three to four times more likely to work with the agent they connect with under the new system versus the old system. The company believes that the changes made could support a doubling of the number of transactions and the amount of commissions from an identical amount of traffic. The company also intends to provide leads that had previously been screened out of the immediate connection process in order to offer agents a greater quantity of new leads. An auction pricing cap in certain zip codes may also help to improve Premier Agent return on investment and encourage more users.
Offers
The company’s homebuying and selling service, Zillow Offers, has seen demand exceed its expectations since it was recently launched. Over 20,000 homeowners have requested an offer from the company in the limited markets in which it has operated since its launch seven months ago, with the company purchasing 130 homes in October. Its unique data set provides it with insights that are unavailable to industry operators, and could mean that it has a competitive advantage when buying and advertising a home.
The company is rapidly increasing the exposure of Zillow Offers across multiple metropolitan areas. It believes that the service will appeal to a greater number of home sellers than offers made by "flippers" and could prove popular among sellers looking for convenience, certainty and a quick sale. Given that the U.S. housing market’s total transaction volume was $467 billion in 2017, even winning a small proportion of the market could boost the company’s total revenue.
Industry prospects
One risk facing the company is the prospect of a rising interest rate. It is forecast to increase from the current level of 2.25% to 2.5% next month, with three further rises anticipated in 2019. This could mean that interest rates reach as high as 3.25% by the end of 2019. The impact of a higher interest rate on the housing market may be negative. This could reduce overall activity and lead to a more challenging environment for Zillow than is currently anticipated, with the company having recently downgraded its sales and profit forecasts for the current fiscal year.
The company, though, accounts for around 4% of the amount spent by real estate agents on advertising per year. Its position as the largest online real estate marketplace may provide it with a unique position to provide an ecosystem that offers more flexible homebuying and selling services to consumers that increasingly expect to be able to utilize mobile apps and websites. The company is finding that consumers wish to have an increasingly digital experience when buying or selling a home. With a focus on enhancing customer satisfaction, it could strengthen its position in a rapidly evolving industry.
Outlook
Zillow’s changing Premier Agent service could lead to improving financial performance. It has proved popular among consumers, and further changes could encourage a larger number of users. Its expansion into homebuying and selling through the Zillow Offers service has also been a success since it launched recently. Expansion into new regions could drive the segment’s profit higher, with its data offering the company a competitive advantage versus existing industry operators.
With consumers continuing to demand an increasingly digital experience when buying or selling a home, the company could be in a strong position to capitalize on an evolving wider industry. Although interest rate rises may cause a slow down in the wider market, the stock could offer recovery potential after underperforming the S&P 500 in the last year.
