A Follow up on Zillow: Tracking Strategic Progress

I fleshed out my thoughts on Zillow (“Z”, “ZG”) more since my last write up and I will share them here. This includes a clearer idea of the strategic game that Zillow has to play, as well as how to track progress. Using these criterias I added a little to my position after the latest earning.

The Long Game

As a reminder, we're playing a very long game here. What matters strategically is being closer to end customers and the transaction itself. Achieving that would flip the power dynamics of the industry in Zillow’s favor.

Here’s a tweet storm I put out a while back on how Zillow has to change its role in the transaction flow.

1/x. Everything Zillow $Z $ZG does (inc. iBuyer and lending) should be judged on how it helps them get closer to consumer and transaction. This goes hand in hand with how data flows through the value chain.

— mspacey (@mspacey4415) April 3, 2019

As a clarification, Zillow Offers will help generate listings instead of “stealing” them from agents (as the accusations go). Here’s how.

Prospective sellers can check out binding offers from Zillow before awarding that listing to an agent. At that point two things can happen: a) if they sell to Zillow, then Zillow obviously controls the seller listing for that property; b) even if they don’t sell to Zillow, Zillow would have came across this clear intention to sell before the agents - a “pre-seller listing” if you will. This is incredibly valuable information in the industry.

In short, by beating agents to listing generation, iBuyers change the entire power dynamics of real estate value chain.

This shift in leverage toward the platforms is why even Keller Williams is getting into iBuying, as seen in this article:

“I feel like I have no choice now,” CEO Gary Keller said during a presentation in January. “I can’t allow Opendoor or Zillow to go out and be the only player in the iBuyer space and then begin to dictate terms and build brand around ‘they buy houses.’”

The key words are "dictate terms". Once you win the game and control the listings, there are many options for monetizing. For now investors are still worrying about Premier Agents, but in a few years what matters won’t be Premier Agent, but "Premier Listings" or whatevers Zillow choose to call their product.

How to Track Progress; Status from 1Q19 Earning

In judging Zillow’s strategic progress, I’m looking for a few things. First, I want to see the iBuyer market taking off. Second, I want to see ZG mitigate the pressure to sell inventories at inopportune times (most likely by addressing holding cost via renting). At some point down the line, I also want to see proof that iBuyer proliferation is giving Zillow greater leverage over the value chain.

Regarding the 2nd point, here’s another tweet storm (sometimes I find the condensed format of Twitter explains things better).

1/x. Today's Barclays report on $Z $ZG has a good point - if you try to flip homes but it's on market too long, then selling price & iBuyer margins are going to take hits.

— mspacey (@mspacey4415) March 15, 2019

So how are we doing? The latest quarterly earnings from Zillow and Redfin showed clear signs of market demand for iBuying. Zillow Offers revenue ramping from zero to ~$130mm to $240mm for the coming quarter is no small feat. More importantly, inbound seller requests are impressive:

“In Q1, we received more than 35,000 seller request and that demand is rapidly accelerating. We now receive one request every two minutes, which is nearly $200 million in potential transaction value per day.”

Redfin’s program, although on a smaller scale, also shows strong market demand.

“From the first quarter of 2018 to the first quarter of 2019, RedfinNow quadrupled the number of homes we sold. This was still less than 50 sales in a quarter, so we are far from the scale of competitors… Demand in Dallas and Denver, the markets we opened in December and March, has been stronger than we anticipated.”

That’s enough for me to conclude that iBuyers are gaining traction, and that the game is changing in Zillow’s favor. So I added to my position.

What I have not seen so far is the second progress criteria - mitigate pressure to sell by controlling holding cost. On the other hand, this could actually be an upside opportunity for the stock. The day Zillow announces some single-family-for-rent REIT is the day that bear thesis of “Zillow is getting into capital intensive home flipping game” goes away.

Remaining Questions

There are some remaining questions I'm still considering. The biggest one is how the game works in a multi-polar iBuyer world.

The iBuying game is on, and obviously Zillow can’t buy all the homes for itself. So this will not be some winner-take-all, monopolistic market. In that world do you really have power over agents? Yes, iBuyers will control a good chunk of listings, so agents have to go to them. But won’t agents pit one iBuyer against another?

The answer is to be determined, but I would say in any case Zillow will still have better power vis-à-vis the agents, and thus profit potential, compared to now.