The U.S. Federal Reserve's aggressive interest rate hikes since June 2022 have significantly impacted the real estate sector, reshaping consumer spending and business investment patterns. According to Redfin (NASDAQ:RDFN), these escalating rates have eroded $40,000 in purchasing power over a year for potential homeowners on a $3,000 monthly budget. This has led to U.S. existing home sales plunging to a six-month low of 4.04 million in August 2023, significantly below the established 25-year average of 5.3 million.
Amid these market shifts, Zillow Group (NASDAQ:ZG) exited its high-risk iBuying business in 2022 due to inflation-induced losses and shifted its focus towards real estate services and the development of a "housing super app". The company is now planning to increase its earnings from each home sale from $4,100 currently to $5,200 by 2025 as part of its earnings increase strategy.
Zillow's Listing Showcase feature utilizes AI to tailor images based on potential buyer preferences and create interactive floor plans for an immersive virtual experience. However, the company's exit from iBuying has resulted in a projected 69% drop in its revenue this year. Moreover, the challenging housing market led to a 6% decline in its services revenue in the first half of 2023.
Despite posting a net loss of $57 million in the first half of 2023, Zillow is moving toward GAAP profitability. Analysts forecast that Zillow's revenue will reach $2.1 billion in 2024, potentially leading to profitability if operating expenses don't increase faster. Furthermore, Zillow is targeting $5 billion in annual revenue by 2025, a significant leap from its projected 2023 revenue.
Economists predict potential changes in economic policy with the Federal Reserve possibly ceasing rate hikes and initiating cuts by mid-2024. This shift could stimulate more homebuyer activity and open an advantageous investment window in Zillow's diverse offerings amidst fluctuating market conditions. If Zillow maintains its current price-to-sales (P/S) ratio, its stock price could more than double upon reaching the 2025 revenue target.
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