What happened
The stock market was little changed on Wednesday morning, but real estate technology company Zillow (Z +0.99%)(ZG +0.91%) was a big underperformer. As of 10 a.m. EDT, Zillow's stock was down by about 17%, and this is on top of a multi-day losing streak for the stock.
So what
Zillow released its third-quarter earnings Tuesday afternoon, but it isn't the latest numbers that are causing today's plunge.
Image source: Getty Images.
Instead, it was the surprise announcement released along with Zillow's earnings that the company plans to permanently shut down its Zillow Offers iBuying business. Zillow has been buying thousands of homes directly from homebuyers each quarter, with the goal of making cosmetic repairs and reselling them for a profit. And until very recently, Zillow had been referring to Zillow Offers as the primary growth engine for the business going forward.
According to CEO Rich Barton, the decision was largely based on the unpredictability in the real estate market. Reports indicate that Zillow owns about 7,000 homes right now and that the majority are worth less than Zillow paid for them.
Now what
It's certainly understandable for investors to be disappointed, as something like this can be a thesis-buster. After all, I personally bought Zillow shares because of the long-term potential of its iBuying business.
And it isn't just that Zillow is exiting the business. In fact, making the tough decision to exit an unprofitable business is typically something I would applaud. It's how it happened.
For one thing, there are several other players in the iBuying space, and they all seem to be doing far better than Zillow. Industry leader Opendoor (OPEN +3.44%) even made it crystal clear recently that its iBuying service is open for business and is performing to expectations. Plus, just last week Zillow released a statement saying that it was pausing its iBuying business for the rest of the year due to overwhelming demand. Things like these are likely causing investors to question the competence of Zillow's management team, and rightly so.
