Online real estate marketplace Zillow (NASDAQ: ZG) fell short of the market’s revenue expectations in Q3 2026, but sales rose 7.1% year on year to $724 million. Its GAAP loss of $0.70 per share was significantly below analysts’ consensus estimates.

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StockStory’s take

Zillow’s third quarter results were met with a significant negative market reaction, as both revenue and profitability fell short of Wall Street expectations. Management attributed these outcomes to ongoing challenges in the U.S. housing market, specifically highlighting the impact of rapidly rising mortgage rates and diminished affordability for buyers. CEO Jeremy Wacksman described current conditions as “one of the toughest housing markets in a generation,” with higher rates reducing transaction volumes and weighing on the company’s core for-sale business. However, Wacksman also pointed to continued strength in Zillow’s rentals segment and the company’s ability to manage costs as partial offsets to these external pressures.

Looking ahead, management’s outlook remains cautious, with expectations for persistent macroeconomic headwinds and a slow recovery in housing activity. The company is prioritizing investments in AI-powered features and the accelerated rollout of its Zillow Preferred agent program, which leadership believes will enhance user engagement and drive more transactions even in a challenging market. COO and CFO Jeremy Hofmann emphasized a disciplined approach to expense management and noted that, despite industry-wide softness, Zillow aims to outpace the broader market through diversification and operational efficiency. Wacksman stated, “We expect to control what we can control on the cost side, and we’ll go grow the company and take share as a result.”

Key insights from management’s remarks

Management cited the sharp rise in mortgage rates and a challenging housing environment as primary reasons for missing consensus expectations, but highlighted resilience in rentals and ongoing investments in AI and transaction services.

• Rentals segment momentum: Rentals revenue grew 26% year over year, driven by robust demand and a 35% increase in multifamily property advertising. Management highlighted that rentals now make up 30% of total revenue, up from 21% two years ago, reflecting Zillow’s strategic diversification.
• AI Mode rollout and engagement: Zillow AI Mode, now available to all signed-in users, has led to deeper platform engagement. Management noted that users engaging with AI Mode spend nearly three times as long on the site, run more searches, and request more tours, signaling early success in driving higher user activity.
• Zillow Preferred program expansion: The transition to the Zillow Preferred agent model continued, with two-thirds of buyer connections now routed through Preferred partners. This model has generated 35% higher revenue per connection versus the legacy advertising approach, with management targeting 100% rollout by early 2027.
• Cost discipline and restructuring: Fixed expenses, including stock-based compensation, declined 8% year over year. Management credited recent restructuring and tight cost controls for partially offsetting revenue headwinds, with share-based compensation down 25% versus last year.
• No material impact from legal matters: Leadership noted that recent legal issues have been resolved without affecting core operations or strategy. Legal expenses are expected to normalize going forward, allowing management to focus on long-term growth drivers.

Drivers of future performance

Management expects the challenging housing environment and affordability constraints to persist, while prioritizing further growth in rentals, AI-driven engagement, and the Zillow Preferred rollout.

• Rental growth as a buffer: Zillow anticipates the rentals segment will remain a key growth engine, benefiting from elevated demand as higher mortgage rates push more consumers toward renting. Leadership believes this business line can surpass $1 billion in annual revenue over time, providing a counterbalance to for-sale softness.
• AI integration to boost engagement: The company is investing heavily in AI-powered features across its products, aiming to deepen consumer and professional engagement. Management sees AI Mode and agentic AI tools as catalysts for greater transaction readiness and agent productivity, with early data showing higher conversion rates among engaged users.
• Rollout of Zillow Preferred model: The ongoing transition to the Zillow Preferred agent program is expected to drive higher revenue per transaction and better alignment with agent partners. While this shift temporarily pressures revenue recognition, management expects it to generate more durable and profitable growth as adoption reaches 100% by early 2027.

Catalysts in upcoming quarters

Over the next few quarters, StockStory analysts will be watching (1) the pace of rentals revenue growth as market conditions remain challenging for homebuyers; (2) adoption and engagement metrics for AI Mode and other AI-powered tools across the platform; and (3) execution and revenue per transaction lift as the Zillow Preferred agent model nears full rollout. Additional attention will be paid to management’s ability to maintain cost discipline and adapt product offerings as the industry landscape evolves.

Zillow currently trades at $29, down from $34.45 just before the earnings. In the wake of this quarter, is it a buy or sell? The answer lies in our full research report (it’s free).

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