Is Zillow Stock Worth Owning Now That It's Moving on From iBuying?

On Nov. 2, real-estate technology company Zillow Group (Z -1.16%) (ZG -1.22%) announced it suspended its iBuying operation called Zillow Offers. The stock immediately plummeted on the news because Zillow's iBuying business was a big source of optimism among investors about the company's ability to create long-term shareholder value.

In this video from Motley Fool Backstage Pass, recorded on Nov. 29, Fool contributors Matt Frankel, Jason Hall, and Jon Quast discuss their predictions about Zillow moving forward.

Matt Frankel: This is one that every time I bring it up, I'm worried Jason is going to throw his computer out the window. This is Zillow ticker symbol Z, this certain number seven. Surprisingly, Jason and I both ranked this in the middle of the packet number five. This was Jon's number nice. Maybe Jon's going to throw his computer out the window. I don't see any windows right near him but I'm worried Jason and I have talked about Zillow on like 10 different shows in the past couple of weeks so I don't really want to go too deep into this. It was off about 75% from its all-time high, down about 44% in the past month. The big reason is they pulled the plug on their iBuying business and I did bring a visual aid for this one because it definitely needs one.

Here's why investors are concerned. It's not just that they're getting out of the iBuying business. We would all applaud a company for getting out of the business that it sees as unprofitable and we made a mistake, we're moving on. For example, if Peloton saw that the treadmill was a real problem and they canceled it. I don't think anyone would have that big of a problem with it. Here's the problem. Zillow has been talking this up as it's big growth driver for several years. This is an investor presentation I found. This is what they called Zillow 2.0. This is from 2020. This is about a year ago. This is not that long ago. If you look at the top of the screen, this is what they were promoting and this is exactly why I bought into the whole Zillow Offers story.

Number one, real estate site in terms of users, in terms of the brand, in terms of the data set they have. They've done it on 135 million U.S. homes, leading technology platform. No one can argue with anything you see on the top of that screen.

What they were going to do is turn this, leverage that and turn it into a platform that buys, sells, rents and the buying and selling was where they really were promoting the growth opportunity. Zillow Offers is their iBuying business. This is what was just canceled. This is what they were going to use to quote, you can see right there, "radically simplify the transaction. Save consumers time", etc. This is the business that they abruptly decided to get rid of. That's what I think is troubling investors. It's not that they were tiptoed into this so that it wasn't a profitable business and got out. They were all in on this as their growth driver.

The other side of it and this is I think, I don't want to speak for Jason, but this is why I ranked it number five, at 44% less than it was a month ago, is Zillow's core business worth owning? Zillow's core business is profitable if they don't pursue any other growth verticals, you still have a profitable business to invest in. Zillow's core business, it's Premier Agent Services mostly is a profitable business. There are other parts of the home transaction that Zillow could go after. They've already had some success in mortgages. They can get to the appraisal business, that can get to the moving business have moving trucks on that you could book through Zillow, they could partner with iBuying services to generate leads. They can get the homeowners insurance. There's a bunch of different verticals they could approach and they have about 9,000 homes on their balance sheet right now. Once they unload that, they're going to have roughly $5 billion dollars of cash on their balance sheet to spend. This isn't a giant company. I want to say it's a sub-$20 billion market cap.

They're going to have a ton of cash to deploy, a lot of potential growth verticals to go after. I wouldn't go so fast to say it's a great place to put new money to work today, but I'm not going to sell my shares at this point, one because I really like talking about it and two because I think at the current valuation the core business makes sense. Jason.

Jason Hall: I'm not going to speak for Jon but just guessing based on the fact that he rated this as lowest ranked stock, I'm probably the only one of the three of us that have bought since Zillow Offers was killed. Actually, I added to my position, I managed to find a period of time where I can quiet down and buy it and this is probably the first time I've talked about it since then.

The reason I ranked it number five is even when I was buying it I was uncertain what the business is really worth today.

Why did I do it? Number one, and Matt this is something you and I've talked about. I'm OK with companies making big mistakes. I'm OK with them because that means they are taking on risk and they're trying new things. If you only own companies, that they do it perfectly every time, you are probably missing out some real opportunities because it's the companies that disrupt and take on risk and build new things and sometimes break things that can be the biggest winners. I took a risk that they realize the better opportunity for them was to be more of that platform. Let the Redfin's of the world, let the pure-plays, the Opendoor's etc. Let them do the iBuying thing. But we're just going to be a pure-play platform. It's a really high-margin profitable business and because real estate is so huge, they can still leverage growth in a ton of the ways that Matt was talking about without having to have a giant, new, multi-billion-dollar business. That's really low margin in high-risk as we learned, unless you execute really well.

Jon?

Jon Quast: For me, the Zillow, pulling the plug on Zillow 2.0 that was the thesis. Buying and selling homes and creating that flywheel of optionality was the thesis for Zillow. Now that they've canceled that and taken it off the table, we needed a new long-term thesis for the company, in my opinion. That to me is why I ranked it at number nine.

I don't really know what that thesis says, could this stock makes sense to own just as it is today? Does the valuation makes sense for where it is today? Possibly. But we've identified a need in the real-estate world of simplifying this process, of making the whole transactional fee structure more transparent and more in users favor. I think that there are other companies seeking to do that. Once they figure out how to do that, even at break-even, they can offer those optionality services because they already have users in the system.

Zillow now is there going away from that, abandoning it altogether, I don't see where the optionality is for the business going forward. If your other companies who are succeeding -- it might be a stretch to say that any company is succeeding in iBuying right now. It might be a stretch to say that -- but as other companies potentially succeed in iBuying, I think they are the ones attracting the users and they are the ones who have the optionality levers to pull. I think that Zillow is on the outside looking in here as far as disrupting the real-estate market.

Frankel: Well, I'll tell you one thing. If I were any of the other iBuying companies, I would be pounding down Zillow's door to partner with them.

Hall: Right.

Frankel: Now that they are out. If Zillow becomes, I've said this before the Kayak of iBuying, where you can go and get an offer for three or four different iBuyers by just going to Zillow. If they announced they were going to pursue something like that, I'd be tripling my investment tomorrow.

Hall: The nature of real estate creates these pockets of conflict of interest. I think Zillow has realized that their best path forward is to reduce those conflicts and be like the one platform where you can work with everybody. I think that's the opportunity. I really do. I'm just not sure what its worth. [laughs].