Zillow Jumps on Co-Founder Barton's Return as Top Executive

(Bloomberg) -- Zillow Group Inc. shares gained the most on record after the company, which runs the biggest U.S. home-search website, said Rich Barton would return as top executive in a bid to win investors’ backing for its plan to buy homes and originate mortgages.

The company said Thursday after markets closed that Barton, 51, who co-founded Zillow in 2005 and served as its first chief executive officer, will take over for Spencer Rascoff. The move was announced along with a quarterly earnings report that showed short-term results below analysts’ expectations. Investors had already been skeptical of Zillow’s transformation of its business.

Zillow surged 25 percent to close at $43.71. It was the biggest jump since the shares started trading in July 2011. They had dropped 46 percent from June through yesterday.

Zillow Jumps on Co-Founder Barton's Return as Top Executive

Changing the company’s leadership “so that my voice is out at front during the period of extreme evangelism seemed like the right thing,” Barton, who was also a founder of travel site Expedia Group Inc., said in an interview. “I’m hoping our investors think it’s the right thing. I know many of our investors, they’ve known me from the beginning, they’ve invested with me with Expedia and other companies as well. They’re used to me pointing at the moon and saying, ‘I want to go step on that thing.’”

‘Free Beer’

Zillow’s plan would transform the way Americans buy and sell their homes as it has changed the way they shop for them, with mouse clicks on satellite maps. In April, the company announced plans to launch a Big Data-driven spin on flipping homes, using its price-estimating software to buy properties, then making some minor repairs before reselling them a few months later.

That business, based on the idea that selling a home is a headache that consumers will pay to alleviate, thrust Zillow into competition with a half-dozen other companies, sometimes called iBuyers, including Opendoor, which has raised $1 billion in venture capital.

On average, customers ask Zillow for offers on their homes every five minutes, said Barton, signaling there’s ample consumer demand for a simplified home-selling process.

"It’s like advertising free beer at a college party," he said.

Analysts who followed the company expressed broad support for Barton’s return, though they had mixed reactions to fourth-quarter earnings.

“While 2019 may be a rebuilding year, we are maintaining our buy rating as the stock appears to reflect upcoming challenges, and we are encouraged by management’s new long-term operating targets,” Canaccord Genuity analysts Maria Ripps and Michael Graham wrote in a note.

Zillow Analysts Cautious on Outlook But Cheer Co-Founder Return

Zillow was started in 2005 by Barton, Rascoff and Lloyd Frink, who wanted to do for the housing market what their previous company, Expedia Group Inc., did for air travel — that is, make it more transparent for consumers. Rascoff took over as CEO in 2010 and led the company through a series of acquisitions, buying Trulia and New York City real estate portal StreetEasy among others, that made the company a dominant player in online home searches.

Barton said that the decision to take control of day-to-day operations evolved over the course of conversations with Rascoff and Frink, who will move from vice chairman to executive chairman, while Rascoff will remain on the board.

An average of 186 million unique users visited the company’s websites and mobile apps each month during the third quarter of 2018, roughly triple that of Realtor.com, which averaged about 60 million users during the same period.

Historically, Zillow’s main business has been selling advertising to real estate agents who wanted to put their smiling faces in front of all that traffic. Over the last year, Zillow embarked on a new strategy to wring greater profits out of that massive audience.

It hasn’t been smooth sailing. In August, the company said that it was taking longer than anticipated to sell the homes it acquires. Three months later, it reported that some advertising customers were pulling their business because they disliked changes to the platform. Shares in the company, which peaked at $65.21 in June, plummeted to a low of $27 in November.

Investors Undecided

“Investors are really undecided about the strategy,” said Andrew Eisenson, an analyst at Bloomberg Intelligence. “When do these investments that they’re making translate for investors? And will they work? I think they will -- in the long term there’s a really good business here -- but there’s going to be a short-term drag.”

Zillow reported $201 million in adjusted earnings before interest, tax, depreciation and amortization, for 2018, below a consensus estimate of $205 million. Zillow is expecting an EBITDA loss of as much as $14 million in the first quarter of 2019, it said in a statement, compared with analysts’ estimates of a profit of $41 million.

The company also offered bold targets over the longer term. In as little as three years, executives see the company purchasing 5,000 homes per month through its instant offers business, generating annual revenue of about $20 billion, and originating more than 3,000 loans a month following the acquisition of a mortgage company last year.

“That implies a whole huge investment that needs to be made,” Barton said. “My challenge will be getting investors really excited about taking this journey over the chasm with us."

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