Author Topic: ZG - Zillow Group  (Read 726 times)

TwoCitiesCapital

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Re: ZG - Zillow Group
« Reply #10 on: Today at 01:58:36 PM »
I haven't evaluated the numbers on the home flipping because I think it's impossible at this point. What I've mostly been watching is how many homes they successfully purchase because that pipeline is crucial for determining potential market.

Things I know:

1) The home buying process is massively stressful, expensive, and inefficient. I went through it in January 2018 and cannot remember a more problematic transaction in my life for someone who had excellent credit and a resources for the down payment. In the future, I'd be very open to the idea of selling to Zillow to avoid the headache and can absilt see the benefit to those who'd like to sell quickly and get money now.

2) If Zillows data is quality, they should be able to accurately price homes to ensure they aren't overpaying and have a small margin of error to compensate them for the trouble.They should also be able to anticipate turns in the market because they'll have direct access to sales data, how long things have been sitting on the market, etc all at the local level.  I'm concerned about them getting this right the first time, which is why it isn't a larger position for me, but I am hoping they do.

3) Even as their spread will trend towards 0 as their data/risk management gets better, the referral to an agent if you don't want to accept Zillow's price is enormously valuable to agents - they're much more likely to transact than someone random browsing the site AND there's information embedded as to what price they felt was too low to accept. This will help Zillow's legacy business with brokers as well.

4) Lastly, Zillow has the opportunity to dramatically improve the buying/selling process while still providing enormously valuable leads AND can make a small spread profit on an enormous potential market to do it. If done successfully, they'll have no problems making it rain for shareholders

I have about 2-3% of my portfolio in Zillow and have been accumulating in the low-to-mid 30s on every dip and selling calls at massive premiums on every pop while I wait for more clarity.

It's not a proven concept and is enormously risky, but if they get it right they will have successfully disrupted a trillion dollars industry and will collect the benefits that come from that.

Certainly iBuying will become a significant industry, but will the fact that it is a capital heavy low margin business, benefit Zillow and Zillow investors?   As an analogy, it probably doesn’t benefit big pharmaceutical from getting into the manufacturing of genetics, doesn’t mean generic manufacturing doesn’t add value to the customer and someone won’t do it.

It's capital heavy, yes, but there is opportunity to recycle the same capital multiple times within a calendar year. Same argument for the low margins. Also, I'd it leads to higher revenues from more qualified leads in the traditional business, that has to be added back here as well as incremental return.

Ultimately, it's consumers who win here. You don't always make money by betting on the company who is doing the best by consumers, but it's generally it's not a bad strategy. Also, it's hard to say people are paying dearly for the potential - it's down 40% from it's local highs when the strategy was announced AND the EV is miniscule relative to the potential addressable market.

 Once again, I'm mostly watching. It's not a huge position for me yet, but I'll be adding as it proves out it's potential or will be selling when it's clear that they've failed to execute.






peridotcapital

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Re: ZG - Zillow Group
« Reply #11 on: Today at 02:32:56 PM »
So what is the elevator pitch for Zillow's home buying venture? Does it go something like this....?

"Once we get good at this we can breakeven (at worst) on the flip itself and then charge a 5% service fee to the seller, which they will gladly pay because its hassle-free relative to the traditional process. 5% isn't a high margin, but the market is so big, 5% of a big number is a big number. With realtor commissions in the US estimated at $75B per year, if we get 20% market share we can net upwards of $7.5B of profit annually, in say, 20 years. Compare that with our current $8B market cap and the stock is a very good long-term buy and hold idea."

Broeb22

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Re: ZG - Zillow Group
« Reply #12 on: Today at 02:33:05 PM »

One thing I've thought about lately is the simple idea of profitability as a checklist item. If the business is public (and thus is relatively established) and is not profitable, then you have to ask why not? If Zillow has all this valuable data, why isn't it using it to make money now? If flipping homes is a profitable business, why are they losing money on each of the thousands of transactions? I think this general concept applies to a lot of businesses. Amazon is the one giant exception to the rule; but the rule might be: if the company isn't making money now, it's highly unlikely that it ever will be a very profitable business.

While I have a strong bias for profitability, looking at profitability in a vacuum is short-sighted in a world where businesses are investing in different parts of their financial statements than others. Fixed assets get capitalized while intangible assets get expensed immediately.

Walmart went public in 1970. They generated positive earnings along the way. But when do you think they went FCF positive? 1997. If you had waited for Walmart to be capable of returning cash back to shareholders, you would have missed multiple hundred-baggers.

If I'm running a business that has fewer physical assets, such as software, am I wrong to reinvest the cash flows I generate back into features my customers want, even if the geniuses in accounting tell me that my investments in software programmers and sales and marketing will reduce current profitability? Silicon Valley companies don't have a great reputation for frugality, but conceptually their profitability in a growth phase will be lower than other businesses who invest in fixed assets to grow their business.


Gregmal

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Re: ZG - Zillow Group
« Reply #13 on: Today at 02:56:41 PM »
So what is the elevator pitch for Zillow's home buying venture? Does it go something like this....?

"Once we get good at this we can breakeven (at worst) on the flip itself and then charge a 5% service fee to the seller, which they will gladly pay because its hassle-free relative to the traditional process. 5% isn't a high margin, but the market is so big, 5% of a big number is a big number. With realtor commissions in the US estimated at $75B per year, if we get 20% market share we can net upwards of $7.5B of profit annually, in say, 20 years. Compare that with our current $8B market cap and the stock is a very good long-term buy and hold idea."

As I said, Im not long this, but I can very easily come up with an elevator long pitch on Zillow focusing on FB and Google like ability to monopolize a specific high volume segment of the internet and then, at the very least, integrate an advertising platform. Off that, you have the obvious realtor transaction biz, and in addition to this, you could, at least very loosely in theory, make the case that they could also raise money from the public markets in order to acquire opportunistic pockets(recognized by their AI) of residential real estate and then run(or outsource) a property management/rental biz.... I believe Warren Buffet said not too long after the GFC that he would be an extremely active investor in single family homes if he could snap up 250,000 at a clip... if the process becomes automated, or moves that way, Zillow will benefit, and can likely move towards achieving what Buffett said he couldn't.

Again this is all just loose elevator pitch and in some ways takes the current business and branches off in ways I would go if I ran the company, but acting like "gee it loses money and I cant see how it ever justifies the multiple.." is shown to be a money losing approach.

Jurgis

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Re: ZG - Zillow Group
« Reply #14 on: Today at 03:00:53 PM »
Some thoughts....

Wow, John Huber. Nice to see you here. Welcome, welcome.  8)
"Before you can be rich, you must be poor." - Nef Anyo
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