- Zillow shares have lost two-thirds of their value since February as the company's new home-buying business turned into a money-losing albatross.
- Zillow said in its third-quarter earnings report on Tuesday that it was exiting the Offers business after the company reported a pre-tax loss of $422 million in its homes segment.
- CEO Rich Barton told analysts that Offers was ultimately "too risky, too volatile to our earnings and operations," and had "too low of a return on equity opportunity."
Once a 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 in 16 months. The stock dropped $21.63 to close at $65.57.
While its core internet marketplace continues to grow and produce cash, Zillow reported a third-quarter net loss of over $328 million on Thursday, all tied to its instant buying, or iBuying, unit.
CEO Rich Barton told analysts on the earnings call that Zillow was shuttering its iBuying operations, where it competes with Opendoor, in a move that will result in cutting 25% of its workforce. Zillow entered the business in late 2019 with hopes of using its popular marketplace site and massive data sets to profit from buying and selling homes in high volumes.
What started off as a boon turned into a money pit.
"We determined that further scaling up Zillow Offers is too risky, too volatile to our earnings and operations, too low of a return on equity opportunity and too narrow in its ability to serve our customers," Barton said. "We've been unable to accurately forecast future home prices at different times in both directions by much more than we modeled as possible."
In particular, the pandemic threw Zillow's predictive abilities into disarray. The housing market dried up for a brief time early last year, and then skyrocketed as the closing of offices and slowdown in business activity in cities led people to move to locations they deemed more desirable. Prices ran up, setting records in many markets around the country.
Zillow was able to make money selling homes at high prices relative to where it purchased them, 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 a broker and dealing with an extended bidding and closing process. After purchasing a home, Zillow would invest in repairs and maintenance and, even when factoring in all those costs, try to sell at a profit.
When the labor market tightened and supply chain bottlenecks sent costs for supplies soaring, Zillow's already thin margins melted away. Add to that a housing market that flattened out or stopped increasing at the rate Zillow expected and the company found itself drowning in a pool of underwater assets.
Barton said the company has learned that it can't sufficiently trust its pricing model, so it's best to exit before jeopardizing the whole enterprise.
"What it boils down to is our inability to have confidence in pricing in the future, enough confidence to put our own capital at risk," he said on the call.
Analysts on Friday swiftly downgraded the stock.
In a report with the headline, "Can't justify buy w/o iBuyer," BTIG cut its rating to neutral. Piper Sandler made the same cut to its recommendation in its report "ZOffers Mothballed," as the company heads back "to its roots as an asset-lite model."
Stifel Nicolaus and KeyBanc opted for the same play on words in maintaining the equivalent of hold ratings on Zillow shares. Stifel headlined its note, "From flipping to flopping," while KeyBanc went with "Flipping is a flop."
Zillow took a $304 million write-down in the third quarter due to "unintentionally purchasing homes at higher prices than our current estimates of future selling prices," the company said in the earnings statement. Zillow said it bought 9,680 homes in the quarter and sold only 3,032.
Zillow is forecasting another loss in the fourth quarter as it recognizes between $240 million and $265 million in write-downs tied to inventory it's already agreed to purchase, and up to $230 million in impairment and restructuring costs, extending into next year, as it winds down the Offers business.
In an interview with CNBC's "Closing Bell" on Thursday, Barton acknowledged there were many people who told him to never get into the home-buying business and to keep Zillow focused on the online marketplace.
"I'm sure there are those out there wagging their fingers at me right now," he said. "And justified."