Why Shares of Zillow Group Plunged 13.2% in December

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What happened 

Shares of real estate tech company Zillow Group (NASDAQ:ZG) fell 13.2% in December, according to data provided by S&P Global Market Intelligence, as the market fell and as investors assessed the risk in the company’s business. Zillow has gained 8.5% in the first few days of trading in 2019 but still continues to see the pressure that tech stocks can’t seem to escape. 

So what 

The biggest announcement out of Zillow last month was that Dallas would be part of the company’s Zillow Offers program. Through Offers, the company buys customers’ houses with cash and then sells them with local realtors. Offers is in only nine cities right now and is very small, having acquired just 168 homes and sold 36 in the third quarter of 2018. But this could eventually be the company’s dominant business if it goes well. With the slow start and uncertainty of success, investors are very concerned the strategy could be too risky for Zillow. 

Homebuyers in front of a new home.

Image source: Getty Images.

It didn’t help that the market dropped nearly double digits in December and tech stocks were among the hardest hit. Investors are concerned that the global economy is slowing down and a recession in China, or the U.S., could be on the horizon. Given the operational leverage in tech, any slowdown would be terrible for earnings, which is why tech stocks were down to end 2018. 

Now what 

There’s no fundamental reason to change your investment thesis on Zillow because of last month’s drop. I would attribute most of the volatility to the market’s decline, and the recovery we’ve already seen in 2019 is evidence that it’s market gyrations that are causing short-term moves. Investors need to see progress on Zillow’s Offer business in coming quarters as a sign that the shift to buying homes has staying power. That’s where Zillow has a chance to be a truly disruptive business in the long term. 

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