Zillow Group's (ZG) accelerated transition to its "postpaid Preferred model" is expected to weigh on near-term residential revenue and margins, even as management states that the shift could support stronger growth beyond 2027, RBC Capital Markets said in a report Thursday.
The model delays mortgage revenue recognition, increases seasonality and replaces some higher-margin advertising revenue with lower margin mortgage revenue, according to the report. The firm said those changes make Zillow's results more "complex" and could cause investors to value the company more like a "cyclical" brokerage business.
Preferred connections accounted for 61% of the total and are expected to exceed 75% by Q4, the firm said. Zillow expects those connections to generate greater use of mortgage, "Follow Up Boss," Showcase and other services, eventually offsetting "lost co-marketing revenue," according to the report.
The bullish case is that Zillow is absorbing the disruption now to reach more normalized, above-market growth by H2 of 2027, the firm said. However, near-term headwinds from rising rates, delayed revenue and questions about long-term margin targets are likely to keep investors cautious, the report said.
RBC maintained an outperform rating on Zillow and cut the price target to $55 from $70.
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