Zillow's Falling -- Don't Rush In

Zillow (Z 1.00%) (ZG 1.15%) announces the layoff of 25% of its staff and the shuttering of its home-buying business, causing shares to hit a 52-week low. Bed Bath & Beyond (BBBY) pops on a partnership with Kroger and an update on its share buyback plan. Motley Fool analyst Asit Sharma, with host Chris Hill, breaks down those stories and Lyft's (LYFT 3.59%) ongoing struggle to work out its own economics.

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This video was recorded on Nov. 3, 2021.

Chris Hill: It's Wednesday, November 3rd. Welcome to Market Foolery. I'm Chris Hill with me today, the one and only Asit Sharma. Thanks for being here.

Asit Sharma: Chris, thank you for having me, sir.

Chris Hill: We've got ridesharing, we've got the stock of the day. We're going to begin with the three alarm fire, that is Zillow. The third quarter results that Zillow posted after the closing bell on Tuesday don't matter. I'm sorry to say that Zillow, but they don't matter because the company announced it is getting out of the home buying business altogether and it is also laying off 25 percent of its employees. At the moment, shares of Zillow are down more than 18 percent, hitting a 52-week low. We can go over the results if you want. But to me, this announcement about the home buying business answers the question that we raised a couple of weeks ago when they announced that they were pausing it. Because they said, "We're pausing this for the rest of 2021," which was a 10-week window. At the time we were like, "So at some point in the next 10 weeks, we're going to get an announcement." They're going to say it's either back on in January or they're going to push it back. It didn't occur to me that they were just shut the whole thing down altogether.

Asit Sharma: I know, right. The other shoe drops with a huge thud. This is very surprising in some ways, Chris, but maybe not so surprising in the others. I want to say here, this is not peanuts. We're talking about a $300 million write down of inventory, additional charges related to homes that are under contract of 240-265 million, and also pre-tax restructuring charges estimated at approximately 175 million to $230 million, this is hundreds of millions of dollars all told and a hit to this business model which was predicated on being able to buy homes at reasonable prices and flip them out of profit. A couple of things that I wanted to point out here and then get your thoughts. Zillow actually has an algorithm which helps it price homes for offer. It's related to the one that is used by people who own homes when they take a look at their Zillow estimates. This is similar technology. This was supposed to be very good at giving them an edge in the market. The opposite seems to be true. In major metropolitan areas, Zillow was pouring in over the last few quarters and helping to drive up demand and drive up prices in markets where it was supposedly using its technology to find reasonable prices. What I am curious about here is that management didn't take any lessons from the great recession in that home prices can be very volatile and may continue to be volatile for years, despite the fact that we do have chronic undersupply in the housing industry, it's not a straight up arc of housing prices any longer. There is something disingenuous here, management today or in their press release is blaming the unpredictability of these prices. I think that was apparent from the start. We're talking about 7,000 homes now that it has to offload from its balance sheet. Chris, am I over thinking this or maybe putting too fine a point on it? Do we need to give management some more credit than I am so far?

Chris Hill: No, I don't think we do. I think that they need to earn that back again. They came out a couple of weeks ago, said, "We're pausing this program," and now it's just being shutdown. Thank you for reminding everyone that it costs money to do this. Anytime we talk about even if it's the right move. Let's just grant them the benefit of the doubt and say, "This is the right move for them to shut this down. It is still costing them hundreds of millions of dollars to do that, to do the right thing." I don't think we're being too harsh on management, and I think 2022 is the year that they need to work very hard to convince people that their underlying business is a strong one, a viable one, and it's growing and therefore worthy of investment dollars.

Asit Sharma: I agree with you, Chris. You and I talk a lot about efficient use of capital and smart capital allocation. You know, there's thousands of investors in the real estate industry, from individual investors who buy and flip homes to partnerships, to institutional investors that buy and sell residential and commercial real estate. Many of these entities are extremely careful with their capital they don't rush in and pour money into metropolitan areas, get into bidding frenzies and go beyond reasonable limits on purchasing. You just have to question the way management try to get into the iBuying space. I think maybe they felt the competitive pressures. They're not the only player or for it, the only player in this space. I don't think this means that other companies that are engaging iBuying necessarily have to move out here. This seems limited to Zillow, but it does make me question the decision-making component of the management team and the board and extending that to maybe an investment thesis. Here's a question that you asked me when we were planning to talk this morning. Would you Chris, maybe take a look at the stock price today and see a potential bargain and hop-in and buy today. I'm curious.

Chris Hill: I understand anyone who is thinking that because this is a stock that's at a 52-week low and possibly going even lower by the end of the day. I understand anyone who looks at this and says, "Look, this isn't a start-up, it's an established company, an established brand." There is something to the underlying business maybe wouldn't be the first time bad news caused the stock to sell off and maybe there is some zealousness where stocks get oversold. All of that said, no, [laughs] I'm not interested in this, at this lower price. What about you?

Asit Sharma: Same, I want to take a look over maybe two quarters to see the drags of this decision playing out, shouldn't have a huge impact on the PnL for a forward-looking investor. But this really is going to hobble them for the near term. I think this will also just give investors a pause, maybe who've been on the sidelines next quarter. Take a look at the core businesses results understand their strategy for competing in the marketplace, but you have that overlay that this is a company that was very aggressive in trying to compete and you have to be careful when you now look at that profit and loss statement, look at that balance sheet and statement of cash flows going forward. You have to incorporate this, I believe, into any investment thesis. Just it hasn't been evidence of the soundest decision-making here. I'm cautious on this one going forward. Don't own it, have been on the sidelines, but not intending to buy soon.

Chris Hill: In three months when they come out with their annual report. That should be the title, the drags of this decision. I think that is the title they should slap on their annual report. The stock of the day is Bed Bath & Beyond. Earlier, the stock was up more than 50 percent. It is falling from that, it is now as we're talking, only up 20 percent. This is because Bed Bath & Beyond announced an in-store partnership with Kroger, which is the largest grocery chain in America. CEO Mark Tritton also said that the company's share buyback program was ahead of schedule. These are two bits of good news. I'm assuming the fact that Bed Bath & Beyond is one of the most heavily shorted stocks on Wall Street is why the stocks spiked the way it did this. Again, these are good data points. I don't know that it's certainly not 50 percent better data points and maybe not even 20 percent better, but good for the shareholders.

Asit Sharma: I wonder if they're even 100 percent better because when I saw this news, I think yesterday, when this news came out, Bed Bath & Beyond stock was spiking over 100 percent in the after hours.

Chris Hill: It was crazy.

Asit Sharma: But sure, we have to recognize here that Bed Bath & Beyond is still a long-term turnaround story. They're not out of the woods yet. CEO Mark Tritton, I think, has done a very decent job of being disciplined in reducing store count in disposing of those non-core brands. The news on the accelerated share repurchase for those of you who don't follow this company closely, isn't itself a wasteful expenditure. This represents the last bit of share repurchases that the company has been funding through selling off it's non-core assets over the last several years. I think a good piece also reduces that outstanding share count. I like this baby step in [laughs] the right direction. I say baby step because one of the things Kroger gets out of this is more extension into the home products and baby products spear for them to move beyond the grocery channel. What this deal does is it gives Kroger omni-channel presence, and they will be able to feature Bed Bath & Beyond gear on their e-commerce sites, and of course, good for Bed Bath & Beyond to get that brand extension. Again, I think we have to also remember that the short sellers are in the stock for a reason. For a while it has been seen as a retailer that might or might not make it. I'm on the side that long-term Bed Bath & Beyond does survive. I like the way that Mark Tritton has been disciplined enough to trim that store count down from about 1,000 branded Bed Bath & Beyond stores, I think roughly 800. I also think that strategic collaborations are the way to go to capital-light model. This is one company that is worth taking a longer term look at. It's not one that I own, Chris, I wrote about it at the beginning of the year. I thought they're moving in the right direction. Finally, I'll say about Bed Bath & Beyond is they were briefly a meme stock during the heyday of meme stocks in the post COVID environment. That seems to have turned into just a more general skepticism on this stock and I think today they show short sellers that they're not done yet and it might not be the best decision to short the stock heavily. Although the turnaround ultimately is something that we'll still have to see whether it pans out or not. I'm on the side that it will.

Chris Hill: Yeah. I think Tritton is one of the main reasons people should think twice about shorting this stock. He used the word discipline and I think that's spot on because from the moment he became CEO, it was clear that he knew what he was in for, had a vision, had a plan to methodically, as you said, reduce the store count, look to strike partnerships like this, look to boost their e-commerce sales. He's someone who very much appears to be in it for the long haul. I think based on Tritton alone, I'd be wary of shorting this stock. We'll see how this plays out in the same way that we were talking about give Zillow a couple of quarters before you decide whether or not to jump back into that stock. I think over the next couple of quarters, it will be interesting to see how much fruit is born from this partnership with Kroger. Because it's not going to be immediate, but it could be a nice win for both businesses. We'll wrap up with Lyft because shares of lift are up 8 percent. Third-quarter profits and revenue came in higher than expected. Revenue was up more than 70 percent year-over-year. You and I were talking earlier, I mentioned this is one of those things that Lyft does maybe once a year, where they put up really good numbers and it's like, that's great, can you do this a few times in a row. Because they haven't been able to do that yet. I don't own Uber or Lyft, and part of it is because it's hard for me to see where they are going over the next three years. I know where they both want to go 10 years from now but the immediate future always seems cloudy with these businesses. To me anyway.

Asit Sharma: I hear you, Chris. Can you string just two of these quarters together? [laughs] Give me three quarters like this and then you have my attention. Between these two archrivals, Lyft and Uber, I like Lyft's the ability to be a little bit more dynamic in their pricing. By that, I don't mean that they are out there in a methodical way capitalizing on search pricing. I actually think Uber does a better job of that. But I think their supply dynamics, their ability to recruit new drivers to the platform, their understanding of how to capture new customers with reasonable pricing and then have moderate pricing increases when needed after loyalty established is very keen. To me their maybe a more viable model than Uber. They burn through less money, that's to start. What I really liked about this quarter, revenue grew 73 percent over a year, which is to be expected because we've got the comparison to last year of a COVID inflicted world. We have less of that this year. But contribution margin, which for all practical purposes, it's easier to think of this as maybe like a gross margin, not quite the same, but it really shows you how much more activity and pricing are contributing to the company's gross profits. That's increased at a rate even in advance of this revenue expansion. Their contribution margin grew about 106 percent year-over-year. That shows me that the pricing models that I experienced personally a few weeks ago when I was in Chicago are at play on a larger scale. Just a quick story anecdote here. I came into Midway airport in the evening, this was about 8:00 at night. I had the two apps lined up, I looked at Uber, to get from the airport to the downtown River North area where I was going to stay for six days, was going to cost 100 bucks, a huge surge pricing. I ended up paying about 33 bucks I think, for my Lyft for the same ride that evening, and I never looked at the Uber app after that for the six days. I was taking public transport and then I was taking Lyft. There are one or two times where I saw a bit of surge pricing, but I was more than happy to pay that. [laughs] I think we see this agility in how the price playing out, and we also see the company's agility again with recruiting new drivers onto the platform, filling that supply side very nicely. We would be remiss not to point out that in the first nine months of this year, Lyft has burned through about $75 million in operating cash. But that's a lot better than the $1.1 billion [laughs] they burned through in the same period last year. There is perhaps some long-term light at the end of the tunnel here. I don't see it being a gap positive, profitable model anytime soon, but I am curious. Chris, you mentioned 10 years, do you visualize a future where in 10 years Lyft and/or Uber might be persuasive investments?

Chris Hill: Yes. But they keep pushing that out further and further. Which is why they never really make it to my watch list, and these are two businesses that I think, if they get to that point where the economics become very attractive, as an investor, I'm happy to be a little bit late on that one. I don't need to be early on either [laughs] of these investments just because I think, like I said, the next few years are just going to be more of the same.

Asit Sharma: I think that's sage advice. The song that comes to mind as Elton John's, I'm Still Standing. If that's being played in the context of Lyft in a few years, they may be worth looking at. I have my eye on their autonomous unit, the self-driving unit that is going to take, again, years to come to fruition. But they've been investing in a meaningful way, not putting more capital than they can bear into that idea. But there's perhaps a future in which Lyft finally finds an equation that works. They are perhaps better at Uber in understanding driver economics, so making sure that drivers can make money. You need drivers to make money, you need riders to feel like they have a reasonable deal for the platform itself to have any chance of making money long term. Those elements seem to be there, you add on maybe an autonomous portion, which theoretically really contributes to that contribution margin over time. You could see this as an investable idea in 5-10 years. But Chris, I love what you said, why even try to be early on this [laughs] come in when it's a more probable [MUSIC] type of equation and an investment that has a clear return on it.

Chris Hill: Asit Sharma, great talking to you. Thanks for being here.

Asit Sharma: Thank you, Chris. Really appreciate it.

Chris Hill: As always, people on the program may have interest in the stocks I talked about on the Motley Fool may have formal recommendations for or against. Don't buy yourself stocks based solely on what you hear. That's going to do for this edition of Market Foolery. The show is mixed by Rick Engdahl, I'm Chris Hill, thanks for listening. See you tomorrow.