Exiting the iBuying Niche Makes Zillow a Buy

For years, Zillow (NASDAQ:Z, NASDAQ: ZG) was known as just an online real estate marketplace — and a very popular one, at that. Z stock mostly drifted sideways as the company stayed in its lane, collecting online home sale and rental listings for prospective buyers to view.

zillow app icon on a mobile phone

Source: OpturaDesign / Shutterstock.com

The next thing you know, around three years ago, Zillow decided to diversify its business model. That might sound like a good thing, but not all ventures are bound to be successful.

Meanwhile, as we’ll explore in a moment, Z stock entered into a period of extreme volatility over the past year and a half. Depending on when you bought the shares, your account might be either bright green or deep red. Or, perhaps you’ve just been sitting on the sidelines and watching Zillow’s story unfold. That’s not a bad thing, actually, as Zillow’s unpopular transition could result in a bargain for enterprising investors.

A Closer Look at Z Stock

Let’s talk about the past 18 months. Z stock bottomed out at around $25 in March of 2020, when practically the entire stock market was imploding. Then an absolute buying frenzy ensued. After having stayed in a range for years, the Zillow share price suddenly exploded to the upside.

The topping process finally occurred on Feb. 16, 2021, as Z stock reached $208.11. As it turned out, that would have been a great time to take profits and just stay away for a while.

By the end of October, Zillow shares were trading at around $100. That’s already a 50% haircut compared to the peak price, but the carnage didn’t end there.

An absolute massacre occurred in early November as Z stock dropped to $64 in just a few days.

Momentum-focused traders would probably advise investors to just stay away. On the other hand, value hunters might be salivating at the prospect of buying such a deeply discounted stock.

Who’s right here? Let’s delve deeper into a specific and challenging real-estate niche and see if we can uncover some answers.

It’s iBuying, Not You Buying

Zillow’s original business model was about you, the home buyer or seller, using online tools to make the whole process easier. The company could have stuck to that model, but no — Zillow had to jump into a seemingly related, but actually completely different real-estate niche business. It’s called iBuying, which is short for instant buying.

InvestorPlace contributor Luke Lango concisely summed up iBuying as “when real estate companies leverage advanced pricing algorithms to make instant cash offers on homes via a website or mobile app, renovate those homes, then flip them for a profit in a few months.”

It’s not people like you and me doing this. Rather, it’s big-money, tech-enabled companies buying up the homes, completing renovations, and then reselling them for a relatively quick gain.

Bad Technology, Bad Business

Zillow got into the iBuying business in 2018 with a segment called Zillow Offers. Zillow Offers generated $1.47 billion in revenues during the first half of 2021.

Sounds like a big winner, right? Not so much, actually.

Remember, the bottom line is generally more important than the top line. Despite Zillow Offers’ ability to generate revenues, it has yet to turn a profit.

How could this have happened? As Lango put it, “Zillow’s iBuying technology is terrible.

Zillow CEO Rich Barton admitted this in a recent interview, saying, “We’ve been unable to accurately forecast future home prices at different times in both directions by much more than we modeled as possible.”

The data bears this out, as Zillow took a $304 million write-down during 2021’s third quarter due to “unintentionally purchasing homes at higher prices than our current estimates of future selling prices.” Thus, it shouldn’t be too surprising that on Nov. 2, Zillow announced its plans to shutter Zillow Offers and lay off 25% of its staff.

The Bottom Line for Z Stock

Exiting the tech-enabled home-flipping business, while embarrassing, is probably the best thing that Zillow could do now.

Hopefully, the company will re-focus on its original business of matching home buyers with sellers. With that, Zillow has an opportunity to rise from the ashes and better serve its shareholders.

Granted, buying Z stock at its greatly reduced price is a risky proposition. Still, it’s an interesting bet that the new Zillow will be a lot like the old Zillow — and that wouldn’t be a bad thing at all.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarketsFinom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. 

Article printed from InvestorPlace Media, https://investorplace.com/2021/11/zillows-surprise-exit-from-the-ibuying-niche-will-be-good-for-z-stock/.

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