Shares of Zillow fell 24% Wednesday, after the company announced plans to exit the home-flipping business due to the inability to accurately predict home prices.
Once the pandemic winner due to its central position in the red-hot housing market, Zillow has lost two-thirds of its value since February and is trading at its lowest level in 16 months. As the core internet market continues to grow and produce cash, Zillow reported a third-quarter net loss of more than $328 million Thursday, all tied to its instant buying unit, or iBuying.
CEO Rich Barton told analysts on the earnings call that Zillow was shutting down its iBuying operations, where it competes with Opendoor, in a move that would cut 25% of its workforce. Zillow entered the business in late 2019 hoping to use the popular marketplace website and massive data sets to monetize the buying and selling of homes in bulk.
What started as a blessing turned into a money pit.
“We have determined that expanding Zillow’s offering is too risky, too volatile for our earnings and operations, too low in return on equity opportunities, and too limited in its ability to serve our clients,” Barton said. “We have not been able to accurately predict future home prices at different times in both directions by much more than we designed as possible.”
In particular, the pandemic has thrown Zillow’s predictive capabilities into disarray. The housing market dried up briefly early last year, then rose dramatically as office closures and slowing business activity in cities moved people to locations they saw as more desirable. Prices soared, setting records in many markets across the country.
Zillow was able to make money selling homes at high prices compared to where I bought it, but at the same time the company was ramping up its buying. The iBuying process allows homeowners to sell on Zillow instantly for cash rather than going through an intermediary and dealing with an extended bidding and closing process. After you buy a home, Zillow will invest in repairs and maintenance, and even when all those costs are factored in, try to sell at a profit.
When the job market tightened and bottlenecks in the supply chain caused supply costs to soar, Zillow’s already slim margins fizzled out. Add to that the housing market, which has flattened or stopped increasing at the rate Zillow had predicted and the company finds itself mired in a raft of underwater assets.
Barton said the company has learned that it can’t trust enough of its pricing model, so it’s best to get out before putting the entire organization at risk.
“What it boils down to is our inability to have confidence in future prices, and enough confidence to put our capital at risk,” he said on the call.
Analysts on Friday quickly downgraded the stock.
In a report titled “No iBuyer Cannot Be Justified,” BTIG lowered its rating to neutral. Piper Sandler made the same cut to her recommendation in her “ZOffers Mothballed” report, as the company heads “to its roots as a limited-asset model.”
Stifel Nicolaus and KeyBanc chose the same word play in maintaining the equivalent of Zillow’s stock holding ratings. Stifel wrote the title of his note, “From Flipping to Flipping,” while KeyBanc went with “Flipping is Flipping.”
In the earnings statement, the company said Zillow received a writedown of $304 million in the third quarter due to “unintentionally purchasing homes at prices higher than our current estimates of future selling prices.” Zillow said it bought 9,680 homes in the quarter and sold just 3,032.
Zillow expects another loss in the fourth quarter as it recognizes between $240 million and $265 million in writedowns related to inventory already agreed to buy, and up to $230 million in impairment and restructuring costs, and extends into next year, as Zillow approaches its due date. Bottom business offers.
In an interview with CNBC’s “Closing Bell” Thursday, Barton acknowledged that there were many people who told him to never get into the home buying business and to keep Zillow focused on the online market.
“I’m sure there are people wagging their fingers at me right now,” he said. And justification.
Watch: CEO Zillow on leaving home business