Updated from 9:06 A.M. to reflect the fact that Zillow does not require agents and brokers to manually update listings in the tenth paragraph. TheStreet regrets this error.
NEW YORK (TheStreet) -- Concerns about Zillow's (Z) - Get Report business model should give investors pause about buying shares of the Internet real estate listing agent, which is scheduled to report fiscal second-quarter fiscal earnings after the close Wednesday.
Zillow will release earnings just two days before the chief financial officer is set to resign. Analysts expect a quarterly loss of 26 cents share on revenue of $168.7 million, with gross margins at 89.6%.
It is hard to understand how a company with an 89% gross margin can't generate an operating profit. For the years 2011 to 2014, Zillow generated total revenue of $706.3 million but posted a net loss of $49 million.
Zillow's largest expense is sales and marketing. During that time, the company spent 49% of its revenue, or $351 million, on sales and marketing.
One would think that the profits would roll in, especially considering that Zillow claims to control 60% of the spending in the real estate portal industry.
In May, Zillow reported that it had 110 million pro-forma unique users. Although the number of users expanded 56%, organic growth slowed sequentially to 35% in the first quarter from 58% in the fourth quarter.
Investors should avoid shares of Zillow until it becomes clear that the company can generate operating leverage from what amounts to free user-generated content.
This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.