I thought I was a businessman… I now realise I’m still a kindergartener compared to some US “businessmen”
Zillow- IPO in 2011 – added $128M to revenues and shares rocketed 19% on “better than expected” revenues. WOW
WOW
Is this a case study that I could teach at SMU?
Let’s take a look behind the headlines
It’s revenue rocketed because they are in a new business… house flipping
So let’s see how Zillow’s new thingy did in the quarter ended March 31:
* Sold 414 homes.
* Sales proceeds added $128.5 million to revenues, for an average selling price of $310,400 per home.
* The purchase cost of these homes added $122.4 million to cost of sales, for an average purchase price of $295,700 per home.
* This amounts to an average gross profit (selling price minus purchase cost) of a meager $14,700, or 4.9% per flip.
Ok at least they make money… or do they. You need to do more than buy and sell to flip…
So Zillow booked the following expenses associated with its home flipping operations:
* $20.8 million in sales and marketing expenses
* $12.3 million in technology and development expenses
* $14.4 million in general and administrative expenses
* $3.8 million in “segment interest” expenses.
So, revenues of $128.5 million from selling the homes, minus $173.7 million in costs and expenses associated with these home sales, for a loss on its home flipping operations of $45.2 million. This loss of $45.2 million on 414 home flips means:
Zillow lost $109,190 per flip on average. Zillow lost 37% on each flip on average.
So this is a horrendous business.
but the shares are up 19%
And due to the loss at its home flipping business, Zillow’s total loss soared by 263%. In other words, a total 51% increase in revenues caused its quarterly loss to soar by 263% to $67.5 million. This loss amounts to a stunning 15% of revenues. And Zillow intends expanding this money losing strategy to other cities.
Maybe they hope to do an Uber … lose so much money they capture 100% of house flipping and can then boost margins to make a profit .
nope, I’m still a kindergartener when it comes to business if this is how success is measured.