The Wind In The Zillows
If it keeps on raining, Zillow’s going to break. If it keeps on raining, Zillow’s going to break.
If Zillow breaks, we’ll have no place to stay… Oh well…
Great Ones, have you ever tried flipping houses before? Sure, some of you probably tried your hand at one or two houses. Heck, some of you might have even made a business out of it and flipped several.
How about 7,000 houses? No? Too many you say? Guess someone should’ve warned Zillow (Nasdaq: Z).
Not content with just “Zestimating” your home’s value, Zillow went on a house-buying spree during the pandemic. Fueled by ultra-low mortgage rates and easy money from the Federal Reserve, Zillow bought homes hand over fist.
It even came up with an AI-driven algorithm designed to outbid competitors and make sure it bought properties in some of the hottest markets … like Phoenix, Arizona, for instance.
Then, back in October, Zillow suddenly stopped buying houses cold turkey. According to the company, it stopped because of labor and supply shortages “in the construction, renovation and closing spaces.”
Zillow initially painted a picture that it can’t get enough people to rehab these homes for sale. However, in an email to The Wall Street Journal, Zillow said it had slowed homebuying because it’s currently “beyond operational capacity in [its] Zillow Offers business.”
So, not enough people to rehab homes to flip and not enough people to sell those homes. Zillow is now allowing potential buyers to use its Premier Agent partners — i.e., not Zillow employees.
The end result of this massive debacle is that Zillow wants to sell 7,000 homes — un-rehabbed — for $2.8 billion. What’s more, Zillow’s not trying to sell those homes to individual buyers like it originally planned. It’s looking for institutional investors … the big boys.
Can you say Financial Feudalism? Sure you can.
Clearly, this is bad news bears for Zillow. It bought too many houses — like waaaay too many. Now it can’t fix them up and doesn’t have the manpower to sell them individually. But the real kicker is that Zillow will take a loss on these houses, selling them for as much as 4.5% to 6% below what it initially paid.
I am not looking forward to Zillow’s earnings report this evening — which might already be out by the time you read this. Anyone from the future want to fill me in? How bad was it?
As bad as this is for Zillow, it’s also a huge problem for the housing market in general. By selling these houses to institutional investors, Zillow can artificially keep housing prices high.
If Zillow sold 7,000 houses on the open market to individual homebuyers at discounted prices, slowing growth in home prices would be more than palpable — so much so that Wall Street might not be able to ignore it any longer.
But institutional buyers can sit on these houses longer and wait for the price they want. Meanwhile, the rest of us are left to sell grandma’s kidneys just to buy a two-bedroom shotgun house behind a Dollar General and a Speedway some 70 miles from downtown.
And the thing that gets me the most about all this is that Zillow Senior Economist Jeff Tucker is running a smokescreen:
Clearly tilted in favor of sellers, huh? If it’s so good for sellers, why isn’t Zillow — your employer — selling its 7,000 homes to individual homebuyers for more than it paid?
We all know the answer to that one, Jeff. You ain’t foolin’ nobody.
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Going: Pfizer Pflabbergasts
Big Pharma mascot Pfizer (NYSE: PFE) reported blowout third-quarter earnings this morning that far exceeded analysts’ profit and revenue projections. Seriously, Pfizer absolutely killed it…
Adjusted earnings climbed 133% from a year ago to $7.7 billion, while revenue jumped 134% to $24.1 billion. That’s the kind of insane growth we expect from tech stocks and startups — not a 172-year-old blue-chip company.
Naturally, Pfizer’s COVID-19 vaccine played a big part in its quarterly growth story, with more than 60% of its sales coming from the company’s vaccine business alone. In fact, vaccine revenue rose to $14.6 billion from only $1.7 billion a year ago — a 758% increase in just 12 months!
But pfantastic earnings aren’t the only good bit of news that PFE investors have to celebrate. On Friday, the FDA gave Pfizer’s COVID-19 vaccine emergency-use authorization for children ages five to 11.
While final approval of the vaccine for children is still pending, this is a big deal for Pfizer’s bottom line. Many kids have yet to get a single COVID shot, meaning a lot of untapped revenue could be heading Pfizer’s way.
Clearly, Pfizer had similar thoughts about this possible revenue uptick. The company raised its full-year guidance by $2 billion and now expects to make between $81 billion to $83 billion. Holy cats!
So, we have impressive quarterly results driven by soaring COVID-19 demand. Business is already booming, yet thanks to the FDA’s recent emergency-use authorization, Pfizer boosted its outlook heading into the fourth quarter.
I think I can safely speak for Pfizer when I say: “Damn, it feels good to be a gangster.”
Going: Under Armour Appeals
Speaking of stunning earnings releases, shares of Under Armour (NYSE: UA) zoomed higher this morning after the company reported strong sales figures and growing demand for its clothes and shoes.
Revenue rose 8% to $1.55 billion from $1.43 billion the year prior, beating analysts’ expectations for $1.48 billion in sales. Adjusted earnings also came in a full $0.16 per share higher than anticipated.
Part of this growth is thanks to Under Armour’s restructuring plan that CEO Patrik Frisk announced back in April of 2020.
In addition to a new operating model, the athletic clothing connoisseur started investing more money into its own website and storefronts to cut out third-party vendors. The bid’s clearly paid off, as wholesale revenue climbed 10% this quarter, while direct-to-consumer sales were up 12%.
But aside from that, Under Armour benefits from the same post-pandemic shift toward overpriced, comfy clothing as rival retailers Nike (NYSE: NKE) and Lululemon (Nasdaq: LULU).
Now that people know what it’s like not to have to dress up for work every day — and with more people continuing to work from home than ever before — there’s no putting “athleisure” back into the proverbial closet.
T-shirts and elastic waistbands are here to stay … and I, for one, couldn’t be happier about it. Under Armour investors surely agree with me, as UA stock has rallied more than 14% since the market opened for trading.
Gone: We Don’t Need No Chegg-ucation
And then there was ugly stepchild Chegg (NYSE: CHGG) — an educational tech company that peddles textbooks, online tutoring classes and other student-related services to sleep-deprived college kids.
Looking at Chegg’s price chart was painful this morning: The company fell more than 45% after it reported lower-than-expected quarterly sales figures and slowing enrollment now that schools have reopened.
Just how bad was Chegg’s latest report?
For starters, revenue came in lower than Wall Street hoped for: Chegg brought in $171.9 million versus the $173.8 million analysts wanted. Not great … but it certainly doesn’t warrant Chegg losing half its stock market value in one fell swoop.
No, the real problem came from the fact that Chegg projected fourth-quarter revenue of $194 million to $196 million … much lower than the Street’s $241 million consensus. To make matters worse, CEO Dan Rosensweig didn’t say much about how Chegg might offset its declining sales moving forward:
In other words, Chegg’s gonna white-knuckle it until either more kids go back to college or the current student body takes on a more rigorous course load. It’s a bold strategy, Cotton. Let’s see if it pays off for them.
It’s Quote of the Week time! And you’ll never guess what talking head is yapping for attention once again.
Is it … Elon Musk? It’s Elon Musk…
We’re long overdue for a Tesla (Nasdaq: TSLA) mention, considering it’s been, like, one whole week since the big red T last came up. Last week, Tesla took off like a billionaire’s rocket once the news hit that it inked a 100,000-vehicle order with rental agency Hertz.
Everyone cheered … literally. Wall Street sent Tesla soaring to a $1 trillion valuation because of the Hertz deal. But hold on … Elon Musk hasn’t weighed in yet. So, what did ol’ Musky say to get everyone’s undergarments in a bunch?
If any of this is based on Hertz, I’d like to emphasize that no contract has been signed yet.
Tesla has far more demand than production, therefore we will only sell cars to Hertz for the same margin as to consumers.
Hertz deal has zero effect on our economics.
Oh, man. Wall Street isn’t going to like this edition of Deal Or No Deal.
First, a 100,000-vehicle deal with Hertz would have “zero effect” on Tesla’s economics? Are you kidding me?!
An order of that magnitude would directly impact Tesla’s economics — not to mention TSLA stock. Yet, even when this deal was first teased, Musk seemed clueless that such an announcement could send TSLA shares rallying as much as they did:
As much as Elon wants Tesla to trade in a vacuum, it does not! Tesla rallied as much as 18% and became a $1 trillion company because of the Hertz order — this deal that isn’t officially a deal.
Speaking of which… That’s a helluva bomb to drop so nonchalantly in a Tweet. Is this just a game to you, Musk? You could’ve at least put on your best Howie Mandel impression and dramatically announced: “No deal!” But nope.
If Elon thinks it’s strange that a 100,000-vehicle order would move Tesla’s valuation … does he know that Tweets like these can and will affect valuations too? Particularly from a certain someone’s widely followed Twitter feed? Shh, ix-nay on the “market manipulation” stuff…
Hopefully, Elon’s not too flabbergasted why TSLA shares sank 4% today. Surprise, squashing the hype of your company’s deal-that’s-not-a-deal can also move your stock valuation. And it will. Easy rally, easy pullback as they say.
The real problem here is that, if you read between the lines, Elon is saying something that should be very unnerving to every TSLA stockholder. In one tweet, he notes how Tesla has a production problem, then he says that the deal isn’t even signed and wonders why it affected valuation.
Elon is confused by Wall Street’s reaction because he knows Tesla can’t build 100,000 vehicles for Hertz right now. In fact, Tesla has trouble meeting its current demand, let alone big fleet orders from Hertz.
Musk is basically admitting: “I don’t know why y’all pushed TSLA higher because of this order — we can’t build any of this stuff right now. Mwahahaha!”
Same as it ever was, Great Ones: Hertz is still a meme stock. Tesla is still meme-stock-adjacent. News affects stock valuations. Water’s wet; time is unyielding … you get the idea.
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Joseph Hargett
Editor, Great Stuff