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Zillow’s Makeover Is Testing Investors’ Patience

Bloomberg logo Bloomberg 8/9/2019 Patrick Clark

(Bloomberg) -- Zillow Group Inc. Chief Executive Officer Rich Barton likens his effort to transform the company’s business model -- and ultimately the way Americans buy and sell homes -- to an attempt to walk on the moon. So far it’s been a bumpy ride.

Investors hammered Zillow shares after it reported earnings this week, as changes to the way the company sells ads, combined with mounting losses from its year-old home-flipping business, spooked investors.

Shares were down 21% for the week as of 11:50 a.m. New York time, the largest weekly decline since November, and a familiar slalom for investors, especially at earnings time.

Last August, the company told investors it had underestimated the time it would take to close home purchases, and that unpopular changes to its core advertising business had chased off real estate agents. Shares plummeted 16% that week, and suffered a weekly loss of 27% the next time it reported earnings, three months later.

“Any time you have significant business transformations, you’re going to have more volatility in the operating numbers, and more volatility in how the stock reacts to the numbers,” said Jason Deleeuw, a senior research analyst at Piper Jaffray & Co. “There’s just a lot going on there.”

Bumpy Ride © Bloomberg Bumpy Ride

For most of Zillow’s 14-year history, the company made money by helping real estate agents connect with homebuyers who visited Zillow’s websites to browse listings. Zillow was, in sales jargon, the top of the funnel. It wanted to get closer to the actual transactions, so last year, it started using its website to buy homes directly from sellers so that it could make minor repairs and resell the properties on the open market. It also retooled the way it worked with real estate agents, culling bad prospects and connecting good ones directly with agents, instead of its previous method of passing on unsorted leads in one big email dump.

Why Zillow Went From Online Real Estate Ads to Flipping Homes

The home-flipping business, modeled after a similar effort by Softbank-backed Opendoor, unnerved investors, who saw the low-margin, labor-intensive strategy as a big leap for a company that mainly employed software engineers to sell online ads. Agents hated the changes to the ad platform, and some stopped spending money on Zillow ads. The company backtracked, and agent churn eventually normalized.

Co-founder Barton took over as CEO when the company reported earnings in February and shares surged as investors focused on consumer demand.

“The really astounding thing for me is how quickly the Zillow Offers business has grown,” Barton said in an interview. “It’s being driven by people who want an easy, convenient, hassle-free way to sell a home.”

Now Zillow has made more changes to its ad business, charging some agents a percentage for converted sales instead of a flat rate for every lead. The changes to the advertising business have the potential to be good for everyone, said real estate tech strategist Mike DelPrete, providing better service to homebuyers, higher profits for Zillow, and a more efficient marketing strategy for smart agents. It also means that Zillow will have to wait longer to recognize revenue, since it’s not getting paid until home sales close.

There were other new challenges, too. Zillow lowered its forecast for its nascent mortgage-lending business, explaining it was still developing the technology. It also said it was writing down the values of homes that took longer than expected to sell.

Zillow: iBuyer Expansion Limits Ebitda

“I assumed 2019 was going to be the investment year,” said Andrew Eisenson, an analyst at Bloomberg Intelligence. “Maybe 2020 is going to be an investment year too.”

(Updates with weekly share declines.)

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To contact the editors responsible for this story: Debarati Roy at, Rob Urban

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