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Why Zillow Co-Founder Rich Barton Is Returning as CEO

By Steve Symington - Updated Apr 25, 2019 at 10:57AM

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A familiar face hopes to lead Zillow through its next phase of growth.

Zillow Group ( Z 3.94% )( ZG 4.25% ) released better-than-expected fourth-quarter 2018 results on Thursday after the market closed, helping shares of the online real estate platform leader soar more than 26% on Friday. But its three-month financial performance wasn't the biggest news to come out of the report. Rather, the market is abuzz over a surprising executive change: Co-founder and CEO Spencer Rascoff has stepped down, and fellow co-founder and former CEO Rich Barton is taking his place.

For perspective, Barton founded Expedia more than two decades ago, co-founded Glassdoor in 2007, and most recently served as Zillow's executive chairman -- a role he assumed after stepping down as CEO in 2010 to let Rascoff take the helm.

That's not to say Rascoff has done anything wrong. To the contrary, considering Rascoff successfully shepherded the company through its initial public offering in 2011 and oversaw 15 acquisitions en route to building the Zillow Group we know today, this transition is an amicable one. Rascoff will step away from Zillow's day-to-day operations but remain on the company's board of directors. And Zillow's third co-founder, Lloyd Frink, will become executive chairman in Barton's place.

Man's hand giving a home key to another person with a "Sold" sign in the background.


Why Zillow is switching it up

But why now? Barton explained:

We created Zillow Group in 2005 to make the real estate shopping and purchase process easier. Much of our original dream is just now becoming possible. We are at an inflection point in this quest, and the time is right to shuffle leadership seats. I am excited to be back as CEO. I am incredibly grateful to Spencer for the indefatigable leadership that got us to this point, and I am happy we will benefit from his continued support and counsel as a board director.

Rascoff echoed that sentiment, stating, "The company is well-positioned for Rich to now take the wheel as CEO through its next phase of growth."

Much in the same way Zillow fundamentally changed how consumers find and use home-related information online, that "next phase of growth" revolves around its efforts to transform the homebuying, home-selling, and mortgage-origination industries. After all, when Zillow first piloted Instant Offers in 2017, the controversial initiative promptly sent shockwaves and outrage throughout the real estate world. This left investors concerned that Zillow would cannibalize its bread-and-butter advertising business by spurning its coveted base of Premium Agents.

In a subsequent interview yesterday, Barton insisted that taking over as CEO "so that my voice is out at front during the period of extreme evangelism seemed like the right thing."

"I know many of our investors [have] known me from the beginning, they've invested with me with Expedia and other companies, as well," he added. "They're used to me pointing at the moon and saying, 'I want to go step on that thing.'"

In other words, Zillow believes Barton is the CEO most capable of leveraging his rapport with investors to appease concerns over the transformation process.

Check out the latest Zillow earnings call transcript.

Here's what's at stake

If all goes as planned, Zillow management believes that in three to five years, the company's homes segment could be purchasing 5,000 homes each month for annualized segment revenue of $20 billion -- and yes, that's "billion" with a b. For perspective, in the fourth quarter of 2018, Zillow bought 499 homes, sold 141, and generated segment revenue of $41.3 million.

Assuming Zillow can attach mortgages to 33% of those homes, its mortgages business would be originating over 3,000 loans per month. All the while, Zillow thinks it can grow its core internet, media and technology segment to nearly double its current size -- to over $2 billion in annual revenue, translating to $600 million in annual adjusted EBITDA.

These are some enormous numbers and lofty goals. But if Zillow achieves them with Mr. Barton leading the way, it seems safe to say the company (and its shares) will be significantly more valuable a few short years from now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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