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What Will Zillow Do With Billions in New Cash?

Real estate technology giant Zillow (NASDAQ: ZG)(NASDAQ: Z) recently announced its intention to exit the iBuying business. While this was certainly disappointing to investors, there's also the reality that Zillow will end up with billions of dollars in cash after it winds down its portfolio of homes. In this Fool Live video clip, recorded on Nov. 5, Fool.com contributors Matt Frankel, Jason Hall, and Matt DiLallo discuss what Zillow could potentially do to create new growth engines.

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Matt Frankel: Zillow, after they unload all these houses that they own, they're going to have something to the effect of $5 billion in cash on their balance sheet. A nice net cash position because their debt is much less than that. This eliminates what they've been calling their biggest growth lever. What do you think Zillow will or should do next? I think they should become the Kayak of iBuying. Partner with all three of them, you can get an offer from all three of the major iBuyers right there through Zillow and pick the best one. Zillow makes a commission no matter which when they go with, and all the iBuyers win the rising tide lifts all ships, that's where I think they should go.

Jason Hall: Yeah, I think being an aggregator is a great place to be, I really do. I think one of my biggest concerns for Zillow has been, like their biggest golden goose is real estate agents. That's what pays the bills for this company, and they've been building a business that would essentially compete with them. Basically, what they're doing is they're going to the realtor market and saying, we're fully embracing you and letting the market to decide about this iBuying thing. I think if they go into it right and just be an aggregator for everybody, that could be a great way to go. It's certainly a harder business I think to screw up operationally. The brand is still really powerful.

Here's the thing, at the bottom, the average person on the street, they have no idea of what we're talking about is even happening. We might say something to somebody about it, and they'll be like, OK. I don't think this harms the brands outside of real estate professionals. I really don't think that it does. This still could be a great business. I'm not acting right now, but we'll see what they do with their capital. I don't think they need to rush and do anything quickly besides just focus on being an aggregator. I really agree with you, Matt.

Matt DiLallo: Yeah, I'm onboard with that idea, I thought that that's where they should have gone from the beginning. Not only with partnering with iBuyers, but even looking at institutional capital, we talked a lot about single-family home rentals. You could probably flip it to Invitation Homes (NYSE: INVH) or someone like that, that is always in the market for homes. Just to be able to offer a bunch of options for sellers and that would actually enhance the rent because sellers know they could go there and sell their home, and want a different demand options out there and not just you selling to Zillow on that market.

That's the optionality aspect of Zillow, and that's why I really don't want to sell my shares, even though I'm really infuriated by management and how they screw this up. But the brand is there. Jason mentioned the cash is there, not that there's a lot that can do with our cash maybe big share buyback or something like that. But I like the optionality there and I don't want to sell because of that.

Frankel: First, I will say if they announced the aggregator thing, I would buy it tomorrow. I'd double down tomorrow. I think the economics of that, if done right, could be fantastic. I mentioned the average iBuyer takes in the neighborhood of 5%-7% as a sales charge. Give Zillow 1%, you keep the other 4%-6%. Zillow makes 1% of a home's price, which is thousands of dollars, for taking none of the risk and putting up none of the capital. That could be fantastic economics for Zillow. Fantastic lead generation for the rest of them. It's just a win-win for the whole industry. If they announced that, I'd be doubling my investment tomorrow.

Jason Hall owns shares of Zillow Group (A shares) and Zillow Group (C shares). Matthew DiLallo owns shares of Invitation Homes Inc., Zillow Group (A shares), and Zillow Group (C shares). Matthew Frankel, CFP® owns shares of Zillow Group (C shares). The Motley Fool owns shares of and recommends Invitation Homes Inc., Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool has a disclosure policy.


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