Zillow, Redfin, and Opendoor are getting pummelled on iBuying news -- is this an opportunity or is the housing bubble about to pop?
Nov. 4, 2021
So much for innovation. Zillow, Redfin, and Opendoor have all seen steep declines for the best part of six months now. All three operate in the online real estate market but differ slightly in business models.
Zillow (-49.9% YTD)
Zillow (NASDAQ: Z) has been a disappointment for investors in 2021. It reached highs of $200 per share in February and the stock has been pummelled ever since. In its most recent escapade, the company has announced its exit from the iBuying industry, incurring significant losses, and cutting its workforce by 25% in the process. The company stated that it underestimated the time and cost it takes to renovate and make the sale, a poor excuse from a real estate business.
However, despite poor decision-making leading to this move, it could be a good thing for Zillow. It has been a real-estate leader for many years now, and built a brand as the go-to home buyer -- Zillow gets 227 million unique visitors to its site each month. But, iBuying was the riskiest and least profitable element of the business model. A trillion-dollar total-addressable-market (TAM) looks great on paper, but when market penetration is minimal, and it leads to losses or low margin gains despite being a risk to its balance sheet, it's probably not worth it.
With a more clear-cut focus on the advertising space, Zillow could bounce back, but for now, it's probably one just to keep on the watchlist, particularly as the iBuying facade unfolds and it unloads the 9,000 homes on its books. Cathie Wood of Ark Invest has recently sold more of its Zillow position following the above, so there could be more pain to come.
Opendoor (-13.24% YTD)
Opendoor (NASDAQ: OPEN) is in a more unique position as it stands to benefit from Zillow leaving the iBuying space. Out of all three mentioned here, Opendoor is by far the most experienced when it comes iBuying, as it pioneered the space. It has been consistently growing margins, 13.4% in the last quarter, but it has also been quite aggressive with home buying, similar to Zillow. It carries risk, but its biggest competitor in the space has just bowed out. Opendoor purchased over 8,000 homes in Q2, so we'll see if it fares better than Zillow on November 10, 2021, when they report Q3 earnings.
Redfin (-29.51% YTD)
Redfin (NASDAQ: (RDFN) also engages in iBuying, but to a much lesser extent than its counterparts above. However, over 25% of 2020 revenues came from iBuying, and it ramped that figure to 36% in its most recent Q2 2021 earnings, so Redfin is exposed. Redfin reports earnings on November 4, 2021, so it will be key to watch out for updates.
Redfin is now also focusing increasingly on rentals, following its acquisition of RentPath last year. Rentals now make up just shy of 10% of revenues, so the company diversified in that sense. It can also leverage its different platforms to encourage cross-selling among its ecosystem of websites.
Winner winner, chicken dinner
You might have guessed it. Redfin is the best bet until iBuying volatility cools down. As I pointed out above, it is diversified, has shown strong incremental growth, and is delving into new areas at its own pace, rather than head-first like Zillow. The online real estate market is here to stay, so the short-term pullbacks could be a great opportunity to add some of these stocks to your watchlist or start nibbling at a position.
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