Shares of Zillow Group (Z, ZG) split in 2015, fulfilling the promise of the real estate portal made to create new classes of shares that give it access to new revenues while also providing a vehicle for further investment.
Zillow created a non-voting Class C stock that was divvied up between its Class A and B shareholders, who got two shares each of the new stock for each share they owned. The C shares trade under the old "Z" ticker on the Nasdaq exchange, while the A shares now trade as ZG. The company wants to use the new stock to make acquisitions and compensate executives.
- Zillow underwent a stock split in 2015 while generating new share classes, and now trades under the tickers Z and ZG.
- Z is for the new class of non-voting stock, C shares, while the A shares trade under the symbol ZG.
- Stock splits often have to do more with financial engineering than with company fundamentals.
- Many tech companies are forming new share classes, such as Google, to help fund stock-based acquisitions without diluting voting rights.
The Impact of Stock Splits
Stock splits and the like are just pieces of financial engineering that have little impact on a company's bottom line. It still comes down to whether a business is strong and its prospects for growth. So, while Zillow isn't a bad business and ought to have some promising growth prospects considering its dominant industry position and the still unlimited potential an Internet-based real estate market possesses, that's not to say it's immune from volatility.
Recall that Google did a similar stock split in 2014. The company now trades under the tickers GOOG and GOOGL to represent the two classes of shares. The idea is that these technology companies, such as Zillow and Google, can use these share classes for stock-based acquisitions and compensation plans.
Putting the Stock Split to Work
In 2015, Zillow closed on its $3.5 billion acquisition of rival Trulia. The integration of software between the retail ends of the two businesses and the industry-facing ones is seen as the greatest challenge, even by management.
The stock split changes none of that, other than providing Zillow with the means to conduct more such transactions, meaning investors should concern themselves with whether they think the real estate portal can make good on its growth promises. However, Zillow hasn’t been active in making major acquisitions since the buyout.
Since the debut, Z and ZG shares have risen just around 20% as of Oct. 2019, while the S&P 500 is up 45%. This proves the notion that Investors should only focus on the core business, not financial engineering.
The Bottom Line
Granted, Zillow’s revenues have steadily grown since the stock split, almost tripling from around $600 million in 2016 to more than $1.8 billion for year-end 2019. However, its earnings have continued to dwindle, with the company generating a net loss of $237 million in the last twelve months. However, on the bright side, Zillow is looking to innovate, having rolled out a home loan service this year. The real estate company has also waded into home flipping, which has received mixed emotions among investors and Wall Street.