Zillow's Strategy Shift Weighs on Shares Despite Strong Growth and Earnings Beat

Zillow Delivers Strong Quarter, but Investors Focus on a Softer Near-Term Outlook

Zillow Group (NASDAQ:Z, ZG) reported another quarter of double-digit revenue growth and stronger-than-expected adjusted earnings, but investors reacted negatively after management issued weaker third-quarter guidance and accelerated a strategic shift that changes how some revenue is recognized.

While the company's underlying operating performance remained solid, the market focused on a combination of softer housing market expectations, restructuring costs, and temporary revenue headwinds tied to Zillow's transition toward its Preferred agent model.

Key Points

• Revenue increased 18% year over year to $772 million, while adjusted earnings and adjusted EBITDA exceeded Wall Street expectations.
• Third-quarter guidance came in below analyst expectations as Zillow accelerated its Preferred business model transition and adopted a weaker mortgage market outlook.
• Investors also weighed restructuring costs, workforce reductions, and analyst downgrades despite continued strength in mortgages, rentals, and AI-powered products.

Why Did Zillow Shares Fall Despite Strong Quarterly Results?

The second-quarter report contained several positive financial metrics. Revenue rose 18% year over year to $772 million, exceeding expectations of roughly $758 million. Adjusted earnings reached $0.52 per share, ahead of analyst estimates of approximately $0.44 to $0.45, while adjusted EBITDA totaled $176 million, above the company's guidance and Wall Street forecasts.

The company also continued expanding across several business lines. Mortgage revenue climbed 75% year over year as purchase loan origination volume increased 95%, while Rentals revenue grew 31% and For Sale revenue advanced 14%.

Despite those results, investors focused on the outlook rather than the quarter that had just ended.

Management forecast third-quarter revenue between $745 million and $760 million, below analyst expectations of roughly $772 million to $774 million. The guidance reflected a weaker housing market, slower mortgage activity, and the accounting effects of Zillow's transition toward its Preferred transaction model.

The market reaction was amplified by elevated expectations following the company's strong execution over recent quarters, leading shares to post one of their sharpest single-day declines.

What Is Driving Zillow's Business Transition?

A central theme during the earnings call was Zillow's accelerated transition toward its Preferred partner model.

Under the legacy advertising model, agents generally paid Zillow upfront for customer leads. Under the Preferred model, revenue is increasingly generated after a home transaction closes, with additional revenue flowing through Zillow Home Loans when financing is involved.

Management said the Preferred model generated approximately 23% more revenue per customer connection than the legacy model during 2025 and expects that advantage to increase to roughly 35% by the end of 2026.

However, the transition creates temporary reporting headwinds.

Revenue that previously appeared in Zillow's Residential segment increasingly shifts into its Mortgage segment, while mortgage revenue is recognized several months after customer connections occur. As a result, reported Residential revenue growth is expected to slow even though management believes the underlying economics continue improving.

Executives said more than 75% of customer connections are expected to flow through the Preferred model by the end of 2026, up from 61% during the second quarter.

What Else Stood Out During the Quarter?

Beyond its financial results, Zillow continued expanding several strategic initiatives.

The company reported approximately 2.8 million average monthly active rental listings while Rentals revenue benefited from strong multifamily demand. Management maintained expectations for roughly 30% Rentals revenue growth for the full year and continues targeting more than $1 billion in annual Rentals revenue.

Artificial intelligence also remained an important area of investment. Zillow said its AI Mode is now available to roughly 20% of signed-in users. According to management, users engaging with AI Mode spend more time on the platform, search more properties, and contact agents at substantially higher rates than users not utilizing the feature.

The company also continued expanding agent-focused products. Zillow Showcase was used on approximately 5% of new listings during the quarter, while Follow Up Boss reached 138,000 monthly active users. Zillow Pro also rolled out nationwide to provide additional workflow and customer management tools for agents.

Management announced a restructuring that reduced its workforce by approximately 7%, recording $36 million of restructuring costs during the quarter. The company expects the restructuring to generate approximately $75 million in annualized EBITDA savings while maintaining its long-term growth initiatives.

What It Means for Investors

Zillow's second-quarter results highlighted the difference between operating performance and investor expectations.

The company continued to grow revenue at a double-digit rate, expanded adjusted profitability, generated strong mortgage and rental growth, and raised engagement through new AI-powered products. At the same time, investors focused on softer third-quarter guidance, a weaker outlook for the broader housing market, and temporary revenue-recognition headwinds created by the transition to the Preferred model.

Management emphasized that the strategic shift is designed to increase long-term revenue per customer connection, even though it may temporarily slow reported Residential revenue growth. Investors will likely continue monitoring whether the company can successfully execute that transition while maintaining growth across its core businesses.

Conclusion

Zillow Group (NASDAQ:Z, ZG) delivered another quarter of strong execution, with revenue, adjusted earnings, and adjusted EBITDA all exceeding expectations. Growth remained broad-based across its For Sale, Mortgage, and Rentals businesses, while AI-powered products and agent tools continued gaining traction.

However, weaker-than-expected near-term guidance, restructuring costs, and accounting changes tied to the Preferred model overshadowed those positives. The sharp share-price decline reflected investors' elevated expectations and concerns about the pace of reported growth rather than a deterioration in the company's underlying business.

FAQs

Why did Zillow stock fall after earnings?

Although Zillow reported revenue and adjusted earnings above expectations, investors focused on weaker third-quarter guidance, a softer housing market outlook, and temporary revenue-recognition headwinds related to the company's transition to its Preferred business model.

Did Zillow beat Wall Street's expectations?

Yes. Zillow reported second-quarter revenue of $772 million and adjusted earnings of $0.52 per share, both above analyst estimates.

What is Zillow's Preferred model?

The Preferred model allows Zillow to generate more revenue per customer connection by earning revenue when transactions close rather than relying primarily on upfront advertising fees. Management expects the model to produce higher long-term revenue despite creating temporary reporting headwinds.

How did Zillow's Mortgage business perform?

Mortgage revenue increased 75% year over year during the second quarter, supported by a 95% increase in purchase loan origination volume.

What will investors watch next?

Investors will likely monitor Zillow's transition to the Preferred model, trends in the housing and mortgage markets, Residential revenue growth, mortgage performance, and whether AI-powered products continue improving customer engagement.

This article was created with AI assistance and reviewed by an editor. For details, please refer to our Terms of Use.

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