mid-week earnings update: 11/3/21

Zillow Group & Opendoor Technologies

Let’s talk Zillow Group and Opendoor Technologies.

Making Waves:

There’s been a lot of talk about iBuying the last couple of weeks – with Zillow now dropping a bombshell on us. In this post, I’m going to share my updated thoughts on the following companies.

· Zillow Group (ZG)

· Opendoor Technologies (OPEN)

I’ll be breaking down all of the important earnings results of the week this Sunday (11/7)

Zillow Group (ZG):

To absolutely everyone’s surprise, including ARK Invest ($900M position), SRS Investment Management ($1.2B position), and countless other funds who invested billions into this company’s stock given the reassurance of and access to Zillow’s management team 1-on-1, Zillow is pulling their iBuyer business segment Zillow Offers.

This sent their stock tumbling down to now $70 / share in a matter of a few days.

Let’s talk through their earnings call, my thoughts, and what I’m going to do with my 39 shares of Zillow stock.

Q3 Financial Results:

· Consolidated revenue: $1.7 billion

· IMT (Internet, Media, Technology) segment revenue growth: +16% year over year to $480 million, and Premier Agent revenue growth of +20% year over year to $359 million, both within the company’s Q3 outlook ranges.

· Homes segment revenue: $1.2 billion, below the company’s Q3 outlook of $1.45 billion at the midpoint of the range, due primarily to renovation and resale capacity constraints.

· Mortgages segment revenue growth: +30% year over year to $70 million, exceeding the high end of the company’s outlook range.

· Consolidated Adj. EBITDA loss: -$169 million

· Adjusted EBITDA by segment: $207 million, $(381) million and $5 million for the IMT, Homes and Mortgages segments, respectively.

To put most of this in perspective, the company completely blindsided us.

Their revenue came in at $1.7 billion – when in their last earnings call (Q2) they’re quoted saying..

But as we said on our Q1 call, we saw significant customer demand at the beginning of Q2 that we expected would drive revenue growth on a lagged basis in Q3, which is now leading to our strong Q3 outlook. And we continued to see strong growth in customer demand as we entered Q3 that we expect will favorably impact revenue in future quarters.

And they directly laid it out for us by saying..

Turning to our outlook for the third quarter, on a consolidated level, we expect revenue to be $2 billion at the midpoint of our outlook and EBITDA to be between $94 million and $126 million.

Well, revenue came in -15% lower than they told us to expect, and adj. EBITDA came in negative aka -$270 million or so less than what we were told to expect.


Then, the icing on the cake was their announcement of shutting down their iBuyer business segment. In case you don’t exactly know what that means, companies like Opendoor Technologies (OPEN) are iBuyers. They put a value on your home, slap a small commission on the purchase it (saving you money from real estate agent fees) and buy it from you.


They then do some repairs, remodel, etc. so within a few months they can flip it for a profit.

This, for Zillow, was known as Zillow Offers. More information about it and the process can be found here on their website.

They named a few reasons as to why they closed the business segment that had previously delivered $1.5 billion in revenue for the company across thousands of homes YTD.

But ultimately, 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 custome

They further explained their logic below.

When we decided to take a big swing on Zillow Offers 3.5 years ago, our aim was to become a market maker, not a market risk taker. And this was underpinned by the need to forecast the price of homes accurately 3 to 6 months into the future. We used historical data and countless simulations to test this belief. We set unit economics targets that required us to stay within plus or minus 200 basis points in breakeven, holding ourselves accountable to these levels publicly with you all.

Yet in our short tenure operating Zillow Offers, we’ve experienced a series of extraordinary events: a global pandemic, a temporary freezing of the housing market and then a supply-demand imbalance that led to a rise in home prices at a rate that was without precedent. We have been unable to accurately forecast future home prices at different times in both directions by much more than we modeled as possible, with Zillow Offers unit economics on a quarterly basis swinging from plus 576 basis points in Q2 to an expected minus 500 to minus 700 basis points in Q4.

Put simply, our observed error rate has been far more volatile than we ever expected possible and makes us look far more like a leveraged housing trader than the market maker we set out to be.

And wildly enough, the nail in the coffin for them was their extremely low conversion rate on Zillow Offers customers – stating they were only able to convert ~10% of serious sellers into taking a deal with them. The other ~90% or so still sold their house, but used an agent or whatever else.

The company will be writing down $304 million in current inventory and another $250 million or so next quarter – expecting a $700 million hit on the top-end of the range.

This is extremely frustrating given Zillow 2.0 was the company’s entire mantra and vision for the last 3 years..

As you’ve heard numerous times from me on these calls, our vision is to help people unlock life’s next chapter. We are uniquely well positioned to deliver on this vision, given our audience, our brand and our profitable and growing core business. In service of this vision, we are innovating on products and services that allow us to evolve from a search and find company to one that is directly helping our customers transact and move. We call this Zillow 2.0 and it firmly remains our vision today.

But it’s worth calling out that sentence in the middle there – “..our profitable and growing core business.”

This is absolutely still the case for Zillow and as shareholders we cannot forget this.

Given our hard-earned position at the top of the seller funnel with 220 million-plus average monthly unique users and the popularity of this estimate, there are better, broader, less risky, more brand-aligned ways of enabling all of our customers who want to move.

Zillow’s CEO does a great job of highlighting the strength of their current core business segment at the end of his explanation – stating..

Of course, the natural question is, what’s next? Before I get there, it’s worth highlighting how strong our core business is, which has thrived while we poured its profits into our ZO iBuying operation. Over that investment period, we expect IMT segment revenue to increase +57% from a reported $1.2 billion in 2018 to $1.9 billion in 2021 at the midpoint of our outlook range. Further, we expect IMT segment-adjusted EBITDA to increase by nearly 3.5x from $240 million in 2018 to $833 million in 2021 at the midpoint of our outlook range.

So to put some numbers around this, they’re expecting 2021 IMT revenue to be around $1.9 billion and 2021 IMT adj. EBITDA to be around $833 million.

The company is currently trading for $70 / share, or about a $16.3 billion valuation which represents the following valuation multiples on their core business alone..

8.5X 2021 IMT Revenue and 18.7X 2021 IMT adj. EBITDA

This puts them around 16X 2022 Core adj. EBITDA

So even after winding down their iBuying business and conservatively taking out -$1B from that, bumping IMT revenue next year by +20% on 44% adj. EBITDA margins I’m coming in around $100 / share price target – representing a +42% upside from here.

No, it surely isn’t the $156 / share Wall Street, and myself, were thinking just the other week when we were assuming billions in additional revenue from the Zillow Offers business segment, but their core business is still strong, growing modestly, and has incredible margins.

For those of you who were jumping all over this stock after I made it a favorite pick alongside Opendoor Technologies (OPEN) last week – I apologize. Myself, and the entire public, were completely blindsided. I did what I could with the publicly available information I had access to.

Considering the potential upside, and the very little exposure (~1%) in relation to my entire portfolio, I’ll be keeping my 39 shares of Zillow which I bought at an average cost of ~$85 / share.

It’s also interesting to see Cathie Wood buying the dip – adding +288,000 shares of Zillow stock to her portfolio, now representing about ~3% total weighting.

Opendoor Technologies (OPEN):

This company was also mentioned as a favorite stock idea, considering you can’t really talk about one without the other. The company reports their quarterly earnings on November 10th, but the stock, as you can see above, has seen some movement with all of the news surrounding Zillow and their similarities with overlapping iBuyer operating strategies.

As mentioned above in the Zillow segment, the company halted their Zillow Offers iBuyer business segment primarily due to the unpredictability of the financials – stating swings of -7% to +5% were common.

Does this happen to Opendoor as well?

Is this a risk Opendoor has exposed themselves to?

If we jump back to the comments made at the Residential Real Estate Tech Conference we learned from Rhett Damon that Opendoor uses many data sources and is constantly looking for new providers / inputs for its algorithm. Damon compared the data Opendoor is using to the bird’s eye view of a car camera. According to Damon, MLS data is not consistent market by market, and has errors, so it’s all about standardizing that data.

There are also forms of imagery and photo tagging that help. Artificial intelligence (AI) and machine learning (ML) help to integrate those types of data sets into algorithms as well. Then there’s move data, neighborhood data, employment data, and the type of data that can identify what is trending geographically – leading to a better-informed pricing decision.

For example, Opendoor uses county assessor data to think about a full picture of data in the community as well as data on the lifecycle of the house – including maintenance information,

and all the information that occur when the homeowner is occupying the home, not just at the sale and purchase point.

According to an expert speaking on the panel, Zillow’s announcement that it will pause the purchasing of new homes in 2021 (and subsequently halt this business) doesn’t impact the greater iBuying demand and predicts it will remain strong.

I want to be very clear – I agree.

I think Opendoor’s valuation compression has represented a buying opportunity for the company throughout the last 4-6 weeks and still represents a solid risk / reward ratio at the current $21 / share it’s trading at now.

This is a ~$15 billion company who will likely do $13-15 billion in revenue throughout 2022 with conservative 10% gross profit margins.

To add some additional “I’m pretty excited about November 10” – Opendoor’s co-founder Keith Rabois threw some shade at Zillow in this Tweet, then confirmed the tables might turn after their earnings are reported.


October 17th 2021

Again, I have no idea what this actually means for Opendoor’s stock – but if on November 10 the company reports some stellar numbers, they’ll solidify themselves as somewhat of a monopolistic leader in iBuying.

To me, at approximately 1X forward revenue ($21 / share), the risk-to-reward ratio on this outcome and its potential positive impact on Opendoor’s stock is weighted in our favor.

Throughout this week and leading into the earnings release, I’ll be increasing my position in Opendoor Technologies (OPEN) from the 0.5% weighting it’s at now to approx. 1.5 – 2.0%.

In Summary:

Zillow is winding down their Zillow Offers (iBuying) business segment, resulting in up to $720 million or so of a hit to their top-line revenue going forward. But, their core business remains strong with healthy growth, profit margins, and future outlook – which is why I won’t be selling my 39 shares of their stock I bought at ~$85 / share.

Opendoor Technologies leverages every data point under the sun to accurately predict home prices, something Zillow admitted they simply can’t do. With Zillow out of the iBuying picture now, Opendoor has the ability to become a monopolistic leader in this iBuying world while currently trading at only 1X 2022 revenue ($21 / share) – which to me represents an asymmetric risk / reward ratio on the stock.

I’ll be discussing Zillow’s earnings and more with the Chief Investment Officer of Defiance ETFs during our livestream this Friday (11/5) at 12pm ET. If interested, click this link and select “set reminder” in the bottom left

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