Zillow (Z +1.86%)(ZG +2.03%) recently announced it plans to pull the plug on its iBuying business, and shares plunged by around 35% as a result. In this Fool Live video clip, recorded on Nov. 5, Fool.com contributors Matt Frankel and Matt DiLallo discuss whether Zillow is worth a look for its profitable core business at the new lower share price.
Matt Frankel: You definitely have to ask yourself, what is Zillow's core business worth now? I don't necessarily want to call this a thesis-busting news piece. It's definitely thesis changing.
Jason Hall: Yeah.
Frankel: It makes it a different kind of company. It makes it more of a value stock than a growth stock, as I said yesterday. Not that Zillow's business is completely mature, but definitely compared to iBuying. Here are my biggest problems with this. There's three problems I have with how this went down.
One, the misleading communications. I'm not saying they knew this was going to happen at the time of that iBuying report in September, but when they put out the thing pausing the iBuying business a couple of weeks ago, they had to have known this was happening. The decision has to have been made by that point, or they made this quick knee-jerk decision in like a week. One of those has to be true. Either poor shareholder communication or misleading shareholder communication.
Two, they have more data on residential real estate than any other company in the world. How are Opendoor (OPEN +0.46%), Offerpad (OPAD +5.12%), and Redfin's (RDFN +0.00%) unit economics better than Zillow's and more consistent? How is that a failure of data management? Is probably the best way I can put it.
No. 3, the Zestimate is why people go to Zillow, to see what their house is worth. That's half the time I go to Zillow is to check its Zestimate for something. I'm sure you guys are in the same boat. This is essentially them saying, we don't know how to price houses. The Zestimate is just a toy. It devalues some of their core business in a way, because it's saying that the data they've been collecting isn't that great. I have those problems. Like Jason said, I'm not rushing to sell Zillow at 30% less than it was a week ago. Is that worth it for the core business? I don't know. I need to take a closer look at it. Plus, I wanted to be able to talk about it today, so I didn't hit the sell button. Those are my problems with the deal. Any other thoughts about that?
Matt DiLallo: I think going back to the whole communication thing, they said that they're only surveying a small subset of their market. Even as they're way overpaying for houses, and Offerpad CEO said to MarketWatch, let me tell you, the easiest thing to do is buy homes. If you pay somebody enough money, they are going to sell your home. I don't understand how Zillow could even screw that up. They were overpaying on so many houses and yet they are only converting 10% of it.
With some of that just completely not understanding the market, it just bothers me that they got that so wrong on how they're pricing homes, and then their competitors even going out and saying, Zillow doesn't know how to execute. That is the really thing that I think is bothering me about Zillow is, just how poorly they executed this whole thing: communicating to shareholders, buying and selling homes.
Did they just have a bad business model? I know each one of the iBuyers has their own little thing like Offerpad. They actually internalize the construction management side of it. Would that have helped Zillow? There's so many more questions and answers with this. It makes me wonder, can they even execute on their core business going forward? Because I like the core business. I didn't like the iBuying business. I thought that a much better option for Zillow would be to partner with an Offerpad or an Opendoor and offer iBuying through that. But I even question whether they can execute that right now. That just seems to be the big thing that their competitors are saying.
Zillow's biggest problem is execution. But I still want to see how these companies executed, too. Offerpad and Opendoor haven't reported earnings yet, so we don't really know if they were able to execute during this period. We just need so much more data to really make a good decision on what Zillow is worth, what iBuying is worth. There's almost more questions right now than answers.
