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Why Zillow Group Stock Surged 46% in 2019

What happened

Shares of Zillow Group (NASDAQ: Z) (NASDAQ: ZG) increased by 45.5% in value last year, according to data provided by S&P Global Market Intelligence.

The stock finished the year soaring after the online real estate marketplace reported accelerating growth through the first three quarters, led by the new Zillow Offers service. Revenue was up 86% year over year in the first nine months of the year, and that was driven by exponential growth in the homes segment, which includes revenue from Zillow Offers.

Image source: Getty Images.

So what

With Zillow Offers, the company buys homes directly from consumers and then resells them on the open market. It's on track to generate $1 billion in revenue for Zillow after just one year since launching.

It was a volatile year for the stock, which likely had to do with investors trying to get a handle on Zillow's new strategy. The company is transitioning from an advertising-based online real estate marketplace to a business that also helps facilitate transactions in order to drive long-term growth.

The negative is that net losses widened through the year in two of the company's three segments -- homes and mortgages. But investors were clearly forgiving of that because of the exceptional top-line momentum. Basically, investors are betting that continued growth like this will allow scale to kick in at some point, as Zillow is able to stretch more revenue across costs and allow a profit to squeak through down the road.

Now what

Zillow Offers finished the third quarter in 21 markets nationally. The company was planning to launch the service in the Los Angeles market during the fourth quarter -- the second largest home market in the U.S., with 2.5 million housing units. There are still several major cities across the country where Zillow Offers is not available yet, so still lots of opportunity here.

As Zillow Offers scales, management expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin for the homes segment to reach 2% to 3%, which excludes earnings from other revenue sources like mortgage origination. Given that the homes segment is on track to become Zillow's largest source of revenue in the short term, the guidance points to a path to profitability, which is likely what sent the shares sharply higher to finish the year.

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John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool has a disclosure policy.


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