2 Major Red Flags With Zillow's iBuying Failure

Zillow (ZG -2.30%) (Z -1.91%) recently surprised investors by announcing that it plans to exit the iBuying business entirely, despite having promoted it as the biggest future growth driver of the company. In this Fool Live clip, recorded on Nov. 4, Fool.com contributors Matt Frankel and Tyler Crowe discuss two of the biggest red flags they see with this move. Fool contributor Jason Hall is also in the clip.

Matt Frankel: So, where to start here? There are a lot of questions I have right now. First of all, the question I'm asking myself as a Zillow investor is, what is the core business worth? Now that the stock is about 30% cheaper than it was a few days ago, is it worth hanging on for their core business? Because the core business that Zillow operates -- you know, the Premier Agent Services, things like that, is wildly profitable.

The Offers was supposed to be the big growth driver but the biggest issue is how they did this. I know Tyler has an issue with this too, because we've had conversations about this and I could hear Tyler yelling through Slack here so adamant about this. Like Jason said, they announced just for a week ago that they were pausing iBuying. The fact that the company with the most real estate data of any of their peers that has been developing away to algorithmically priced homes for over a decade in the form of the Zestimate couldn't do a better job with iBuying than the other peers. The unit economics for Opendoor (OPEN -2.22%) and Offerpad (OPAD -10.58%) look much better than Zillow's.

The fact that Zillow couldn't do a better job with iBuying just screams failure of management to me. The other question I have is what does this mean for the other iBuyers? I think this is a positive for companies like Opendoor and Offerpad because their biggest competitor is out of the way. I don't think the iBuying business is in trouble. I think this is a failure of Zillow to do it well.

Jason Hall: Tyler.

Tyler Crowe: I have a lot of very mixed feelings about this because something here, this is my opinion. To me, something feels like it doesn't add up here. For two years, three years, Zillow has been planting it's flag saying that iBuying and the idea of becoming embedded in the real estate transaction further. Every investment presentation you looked at, it was going to go into buying, get into some captive finance title. Everything was about streamlining the entire process.

Zillow Offers was the lynchpin to this entire corporate vision for three years. They were spouting this as early as two months ago, three months ago, when they were issuing press releases, talking on the quarter and in a matter of months, they shut it down completely. What spooks a management teams so much that they look at it over this very short window and say, we need to cut ties completely with this entire business. It's not like we need to make some operational tweaks to our algorithm because we're maybe overpaying for some things. Or as we've said, there's some contractual issues with bringing on some outsiders to help with the flips and there was capacity constraints.

Those all sound like fixable problems. Zillow wasn't under activist management pressure to show results. Nobody in the iBusiness is in a show-me moment, so I am intensely curious to find out what scared the pants of a management that they wanted to cut ties with this and be done with it. The other thing about it is as they underlying this position, they have $2 billion in cash on their books right now, they unwind their inventory. We're looking at about $4.5 billion in cash just sitting on the business and as Matt said, it's a profitable asset-light business.

Maybe growth is not what it was and this was the growth ever, but $4.5 billion is a lot of walking around money and a lot of options like you can buy two Offerpads for $4.5 billion right now. I am more than anything, I'm becoming fascinated with the story like what happened in that boardroom, and where do they go from here.