Zillow shares plunged 9 percent on Friday after the online real estate database company announced it will begin buying and selling homes, a capital-intensive endeavor.
With Zillow's new program, announced on Thursday, home sellers in the test markets of Phoenix and Las Vegas will be able to use Zillow's platform to compare offers from potential buyers — and Zillow. When Zillow purchases a home, it will aim to quickly flip the home, making updates and repairs and listing it as soon as possible. An agent will represent Zillow in each transaction.
"We're entering that market and think we have huge advantages because we have access to the huge audience of sellers and buyers," Zillow CEO Spencer Rascoff said on CNBC's "Squawk Alley." "After testing for a year in a marketplace model, we're ready to be an investor in our own marketplace."
But investors are less enthusiastic. Flipping homes, a model that's being utilized by start-up Opendoor, is very different than operating an internet marketplace. It carries additional risk associated with buying and selling homes and requires a hefty investment in operations. And it also potentially puts Zillow in direct competition with the realtors on its platform.
Zillow sank $5, or 9.3 percent, to $48.77 as of mid-day on Friday, knocking more than $900 million off its stock market value.
"This is a business model that to date has been all advertising revenue driven, which is high gross margin," said Mark Mahaney, an analyst at RBC Capital Markets who has a "buy" rating on Zillow. "And now there's this pivot into this other category which has balance sheet risk and it has much lower margins and is in an uncertain housing environment," Mahaney said on CNBC's "Squawk on the Street."