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Here’s the Growth Stock to Buy If Interest Rates Fall in 2024 — and … – The Motley Fool

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Last year, the U.S. Federal Reserve embarked on the most aggressive campaign to hike interest rates in its history. It has raised the Federal Funds Rate from a historic low of 0.25%, to 5.50%, which has placed enormous pressure on many industries throughout the economy, but especially real estate.

Existing home sales fell to 3.9 million on an annualized basis in September, which was the lowest level since 2010. With mortgage rates above 7%, buyers can’t afford to borrow as much money, and homeowners who took out a mortgage a few years ago are reluctant to sell because it means giving up their low fixed rate.


Buy/sell, rent/lease residential &
commercials real estate properties.

Zillow Group (Z 3.23%) (ZG 3.19%) operates several technology businesses within the housing sector, so it has been one of the hardest-hit companies amid the seismic shift in rates. Unfortunately, that isn’t the only challenge Zillow has grappled with over the last couple of years.

But some of Wall Street’s top analysts are predicting the Fed has now finished tightening economic conditions, and it might even cut interest rates four times in 2024. Given Zillow stock is trading near its 52-week low, now might be a great time to buy ahead of what could be a more favorable housing market in the new year.

Image source: Getty Images.

Zillow lost its largest revenue stream in 2021

The U.S. housing market was red-hot during 2021 on the back of record-low interest rates and pandemic-related government stimulus. Zillow’s largest business at the time was iBuying, which involved purchasing thousands of homes directly from willing sellers and attempting to flip them for a profit.

But following a series of miscalculations which resulted in losses on its property inventory, the company was forced to close its iBuying segment in November of 2021. It might have been a blessing in disguise given the substantial interest rate increases that were around the corner, but iBuying made up 73% of Zillow’s total $8.1 billion in revenue that year, so the exit left a gaping hole in its financials.

Zillow stock has since plunged 81% from its 2021 peak as a result.

Now expanding its portfolio of services

Direct buying is a very capital-intensive practice with thin profit margins, so small movements in the real estate market would dramatically affect Zillow’s financial results. Now the company is instead focusing on more predictable (and more stable) service-based segments like software, mortgage originations, and closing services.

The company’s ultimate goal is to create what it calls a “Housing Super App,” a one-stop digital destination for every homebuyer and seller. To achieve this, Zillow will leverage its enormous online presence; in the recent third quarter of 2023 (ended Sept. 30), its online platforms attracted 2.6 billion visits from 224 million monthly active users. Last year, the company said its market share stood at a dominant 63%, with second-placed Realtor.com standing at a distant 20% share.

Zillow estimates the average home sale generates about $17,500 in fees from the mortgage, seller services, closing services, and buyer referrals. In 2021, the company was capturing about $4,100 of those fees, but its strategy is to increase that number to $5,200 by 2025.

It will do so by expanding its portfolio of services. In Q3, for example, the value of mortgages originated by Zillow soared 88% year over year. Plus, the company just acquired Follow Up Boss, a software platform helping real estate agents manage their customer relationships.

It follows Zillow’s acquisition of ShowingTime in 2021, which helps agents manage viewings. Zillow has built on the platform’s technology since then, introducing a real-time touring feature that allows sellers and agents to seamlessly lock in viewing times. From there, prospective buyers can instantly book in a showing and view the home.

Why Zillow stock is a buy now

Zillow’s third-quarter revenue came in at $496 million, which represented an increase of 3% year over year. It also exceeded the company’s guidance. Its residential revenue — which includes agent and seller services — declined by 3%, but that was an outperformance compared to the broader real estate industry, which Zillow says declined by 14% in the same period.

Zillow’s overall top-line growth was driven in part by its rentals segment, which saw a 34% jump in revenue year over year. The company says its platform experienced a 45% increase in the number of rental listings during Q3, driven by a decline in occupancy rates which suggests the market might be shifting in Zillow’s favor (more turnover equals more revenue).

As I touched on above, there is a growing consensus that the Fed has finished hiking interest rates. CME Group‘s FedWatch tool implies four rate cuts in 2024 — one each in May, July, November, and December. That will almost certainly breathe life into the languishing existing home sales, and more homes changing hands will lead to more revenue for Zillow.

Wall Street analysts expect Zillow to generate $1.9 billion in total full-year revenue in 2023. But the company anticipates its growing portfolio of services will carry that figure to $5 billion by 2025.

Zillow stock is currently trading 24% above its 52-week low. While that sounds like a solid bounce, remember that it’s still 81% below its all-time high. With that in mind, now might be a great time for investors to buy in.

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