Should Zillow Investors Be Worried Right Now?

Not long ago, real estate tech giant Zillow (ZG 1.15%) (Z 1.00%) was hyping its iBuying business, saying it would become the company's biggest growth driver. Then, early this month, it abruptly announced it was exiting iBuying entirely. In this Fool Live video clip, recorded on Nov. 9, Fool.com contributor Matt Frankel, CFP®, and real estate analysts Matt Argersinger and Austin Smith, discuss whether Zillow shareholders should be worried about the company's future.

Matt Argersinger: Does that worry you guys at all, that Zillow, probably [the] biggest brand, most capital-resourced company, is exiting where these other companies aren't?

Matt Frankel: No, because on the chart where you compared the profitability of the three -- Zillow versus Opendoor (OPEN) and Offerpad (OPAD -0.67%) -- the fact that Zillow's profit was so negative, even in the second quarter, really shows me that they just fumbled the ball. Like you pointed out, this is a company that has more real estate data than anyone else on the planet. They had 2.7 billion visits during the second quarter to their website. They have data on 135 million American homes.

That's an enormous amount of data. They've been developing the Zestimate since, I think 2008 or 2009, before Opendoor and Offerpad were even in business. The fact that they couldn't leverage that to be more efficient, that's really what they messed up on.

The others seem to be focused a lot more on efficiency. Zillow is kind of "growth at all costs" -- which works when you are in a high-margin business like their Premier Agent Services, but doesn't really translate well to iBuying. They found out the hard way that growth at all costs is not the approach that's going to scale this.

Argersinger: Yeah.

Austin Smith: That's really well said, Matt, and I don't think I can add anything to it. I have two major concerns and that is one of them -- that Zillow, arguably the best positioned, stumbled the worst here and I don't understand that, especially when you have a visionary and tech Mount Rushmore leader like Rich Barton. It is confusing and disappointing. The second concern that I have and Matt, I believe, probably all of us share this, was just the communication here.

We have to talk about what seems very clearly from the outside to be a betrayal of investor trust. The misstep itself happens, and as Motley Fool investors, we expect companies to go try new things. We expect them to stub their toes. We also expect them to pull the plug quickly when it doesn't work. But the narrative here changed virtually overnight, from the veneer of "There's so much demand we can't keep up, which is a positive," to "We're laying off a quarter of our company and shutting down this billion-dollar business." That whole spectrum went, maybe seven days. The story didn't change that quickly over seven days. They knew they were structural problems when they first rolled out that PR statement.

So, the two biggest concerns to me -- Matt, you articulated the first one very well: Zillow is arguably the best positioned here and fumbled it. And then two, the betrayal of trust. That first one goes to my thesis for owning Zillow all of these years, which has been [that] they have optionality, and they can leverage that optionality to try new things. That may still be true, but do we trust them to now execute on that optionality?

The Zillow model today doesn't look all that different from Zillow of eight years ago. Mortgages is great. I'm glad they've added that, seems like they should have done that six years ago. Rentals has never become as big as Spencer Rascoff, maybe initially expected it to be. Zillow still has a lot of optionality, but do they have the operational wherewithal to pull off these other avenues? That's a ways over my head as a Zillow shareholder.

Argersinger: I think the distrust is a real good point because you're right. It seems like ... when was it, Frankel, in September when Zillow came out with that glowing research report about iBuying, and how they think it's one of the greatest market opportunities in residential housing. And here's all the great data behind it and it's got so much room to run. It was barely two weeks later or three weeks later, they say they're pausing it, and then three weeks or two weeks later, they're exiting completely. In a market-investing time frame, that it's like lightning in terms of pivoting. It's a good point about just, can we trust Rich Barton and the management team? They took a huge, big, bold bet, fumbled it, as Austin said. Understandable, probably. But given the communication and the shareholder stewardship here, that's got to be a big black mark.

Frankel: That time frame is just such a big red flag. One of two things has to be true. Either they put out the "pause iBuying" report, and then made a real knee-jerk reaction to one bad quarter, or they had already made the decision at the time they said that they were pausing iBuying. So either it was a misleading communication or a knee-jerk reaction to shut down a multibillion-dollar part of the business. Either way, that's a big red flag, in my opinion.