Don’t Short Housing, Short Zillow

It seems like just yesterday that a real estate agent in Nevada had gone viral floating a conspiracy theory that Zillow was manipulating local markets to their benefit. Zillow denied the accusation and six weeks later announced massive losses for their ibuying program. Almost one year later the stock is down almost 70% and Laura Forman at the Wall Street Journal says the stock still has room to fall…(WSJ)

• Declining ad revenue. Forman reported that Chief Financial Officer Allen Parker said “that in a quickly declining macroeconomic environment, agent ad spending tends to slow down as buyer demand wanes. Importantly, he also said the slowdown in spending on Zillow’s platform tends to lead the market’s transaction declines, implying Zillow could see outsize weakness sooner rather than later.”

• Holding on to employees. Chief Executive Richard Burton said he “launched an employee-retention plan this month, including an off-cycle grant of restricted stock units to employees—ultimately accepting an expected 2% dilution over a few years in an attempt to ensure his top talent doesn’t flee over lower compensation…”

However, there could be some good news on the horizon for the company. Zillow has partnered up with automated home-flipping market leader Opendoor. Zillow will collect a referral fee when its users choose to sell directly to Opendoor. But the bright spot, potentially, is what happens if customers decide to go the traditional route. Zillow can filter the leads to the so-called “Premier Agents.” Forman notes “It also brings to the platform home sellers it can try to monetize on a subsequent home purchase, via adjacent services like mortgages, title and escrow.”

Zillow is looking at short-term pain no matter what happens with its operations. Whether or not that leads to long-term pain it is probably too early to say.