Strong Beats Mask Zillow’s (Z) Restructuring And Headwinds

Zillow reported earnings for the second quarter, beating expectations in multiple areas, including revenue, EBITDA, and key revenue streams, while simultaneously announcing restructuring efforts and leadership changes. The CEO, Jeremy Wacksman, and COO and CFO, Jeremy Hofmann, highlighted a business model growing faster than the housing market, alongside a restructuring plan to support this growth.

Zillow's revenue increased by 18% year-over-year to $772 million, with EBITDA reaching $176 million, marking a 23% margin. For Sale revenue rose 14% to $549 million, even though the purchase mortgage market remained flat, and mortgage revenue jumped by 75% to $84 million as loan origination volume nearly doubled. Rental revenue grew by 31% to $209 million, driven by 42% growth in multifamily units and a record 79,000 multifamily properties listed on the platform.

The company is also increasingly leveraging AI, with engaged users spending three times longer on the site and contacting agents nearly three times more frequently than other users. Zillow Home Loans has become one of the top-25 purchase lenders in the nation, and the company's shift towards the preferred agent model resulted in 23% more revenue per connection in 2025, with management targeting a 35% increase by the end of 2026.

The company allocated $200 million for stock buybacks during the quarter and $826 million year-to-date. However, the financial report also revealed challenges, including a workforce reduction of about 7%, leading to $36 million in restructuring costs, with an additional $23 million to $28 million expected in the third quarter. COO Jun Choo stepped down due to health reasons and was replaced by Hofmann in an expanded role.

Despite an adjusted net income of $118 million, Zillow posted a GAAP net loss of $4 million. Management revised its outlook for the purchase mortgage market, now anticipating originations in the low to mid-single digits, rather than the previously anticipated flat market. The shift in core business areas is expected to be challenging, with residential revenue expected to remain flat in the third quarter and only in line with a declining mortgage industry in the fourth quarter.

The accounting mechanics of the preferred transition and seasonality are adding headwinds, particularly in Q4, as revenue shifts from residential to mortgages and a 200 to 300 basis points headwind in Q4. The hedge fund ownership fell from 70 funds to 59 in the most recent quarter, suggesting a potential bear camp in the market.

The stock trades at a forward P/E of 15.27, which does not seem to reflect aggressive growth assumptions. While the core numbers, such as rental growth, AI Mode engagement, and lending business, indicate a company outgrowing the current housing market, the restructuring efforts, leadership changes, and accounting headwinds complicate the overall outlook.

Given these factors, some analysts believe that other AI stocks may offer greater upside potential with less downside risk.