Will Zillow's adjusted EBITDA margin exceed 28% for FY2026?

Management guided ~200bps EBITDA margin expansion (24% to ~26%). Reaching 28% requires 400bps expansion — double the guidance. The fixed cost base (~$1B flat) and mid-teens revenue growth provide natural leverage, but management explicitly flagged headwinds: legal expenses (100bps), variable costs ahead of revenue in H1, and investment in Zillow Pro. Management has visibility into these dynamics and is guiding toward 26%, not 28%. Outperforming by 200bps would require either significantly lower legal costs than expected or higher-than-guided revenue growth driving better leverage.

The margin expansion math: FY2025 was ~24%. Revenue at mid-teens growth on $1B fixed costs creates ~200bps natural leverage. But variable costs are guided ahead of revenue in H1 (negative margin impact) and in-line in H2 (neutral). Legal expenses add 100bps headwind. Net effect is ~200bps, consistent with management guidance of ~26%. To reach 28%, Zillow would need: (a) revenue growth above 20% (unlikely per consensus), (b) legal costs resolving below guidance (dependent on RESPA, which we estimate has only 30% chance of near-term resolution), or (c) dramatic cost efficiency not signaled in guidance. None of these are the base case.

I give slightly higher probability because Q4 2025 EBITDA margin was 23% on $654M revenue. If we annualize Q4's run rate and factor in the typical seasonal pattern (Q2/Q3 tend to be stronger for housing-related companies), there is a scenario where Q3/Q4 2026 margins reach 28%+ even if the full-year average is lower. But the question asks about FY2026 full-year margin, not a single quarter. The back-loaded margin profile (H1 investment, H2 leverage) could push H2 margins toward 28-29%, but the H1 drag would pull the full-year average below 28%. I lean toward ~25% probability — possible if revenue significantly beats and legal costs resolve.

Management is explicit: ~200bps expansion. They have good visibility into their cost structure (fixed base at $1B, variable cost plans, legal expense estimates). Reaching 28% requires management to be wrong by 200bps on the upside — which means either their revenue guidance is too low or their cost estimates are too high. Given management's track record of delivering roughly on profitability guidance (FY2025: ~180bps expansion), a 200bps upside miss is unlikely. Below 20% probability.

The scenario where 28% is achievable requires: revenue growth above 18% (providing incremental fixed cost leverage beyond what's guided), AND legal expenses coming in at the low end of the 100bps range, AND variable costs not actually running ahead of revenue in H1. Each of these has maybe 30-40% individual probability, and they need to happen simultaneously. Combined probability is in the 15-25% range, which is where I land.

FY2025 margin was ~24%. FY2024 was ~22%. The improvement trajectory has been ~180-200bps per year. Jumping to 28% would require 400bps — a discontinuous acceleration in margin expansion. There is no visible catalyst for such acceleration: housing volumes are flat, legal costs are rising, and investment in new products continues. The steady-state trajectory points to ~26% in FY2026 and ~28% in FY2027 at the current pace. Below 20%.

Management guides 200bps expansion to ~26%. Need 400bps for 28%. Double the guided improvement. Legal costs and investment headwinds make this unlikely. Below 20%.

Some upside from potential revenue beat driving better fixed cost leverage. But variable cost investment in H1 and legal expenses are known headwinds. 28% is more likely a FY2027 outcome at current trajectory. ~20%.

The math simply does not work at guided growth rates. Need revenue beat AND cost underrun simultaneously. Low probability event. Below 20%.