Zillow Q3 Miss and Lowered Guidance Confirm Housing Market Weakness

What happened

Zillow Group reported third-quarter results that fell short of Wall Street expectations, sending the stock sharply lower. Management also reduced its full-year revenue outlook, citing persistent softness in housing transactions and traffic declines. This marks a direct hit to the top line despite earlier improvements in operating leverage and mortgage origination volume. Analysts warn that Zillow's troubles are far from over, pointing to ongoing listing feed disputes and elevated legal costs that could further pressure margins. The development shifts the risk-reward further to the downside, consistent with the DeepValue bear scenario that values Zillow at $24 per share if listing access and litigation risks persist.

Implication

The Q3 miss and guidance cut reinforce our cautious stance, as housing market weakness is likely to persist given mortgage rates above 6.5%, which Zillow's own data links to declining listings and sales. The company's premium valuation of 22x EV/EBITDA leaves no margin for error, and the bear scenario's implied value of $24 suggests further downside from current levels. Investors should monitor the July 2026 MLS injunction hearing outcomes and Q4 legal cost trends, as those will determine whether the operating environment worsens. Until then, we maintain a WAIT rating and would only consider re-entry near the attractive entry price of $28, while acknowledging that the probability of the bear scenario has increased.

Thesis delta

The prior WAIT thesis centered on waiting for clarity on MLS feed disputes and legal costs while fundamentals improved modestly. The Q3 miss and lower guidance indicate that housing market softness is now directly impacting revenue, increasing the likelihood of the bear scenario. Consequently, the thesis shifts to a more defensive posture: the risk/reward has deteriorated, and we now view the bear case as the base case absent positive catalysts.