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Zillow Stock: Buy, Sell, or Hold?

On the one hand, Zillow (NASDAQ: ZG)(NASDAQ: Z) pulling the plug on its iBuying business is certainly disappointing from a long-term investor's perspective. On the other hand, Zillow has a massively profitable core business and now trades for 40% less than it did a few weeks ago. In this Fool Live video clip, recorded on Nov. 9, contributor Matt Frankel, CFP®, along with real estate analysts Matt Argersinger and Anthony Schiavone discuss whether Zillow is worth owning now.

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Matt Argersinger: The fact that they're exiting that, does that make you believe that Zillow's best growth days are kind of at the end?

Matt Frankel: Absolutely. There's two questions here, one, at the new lower-price, is Zillow's core business worth an investment? I would say probably yes to that. At a 30% discount, that is the most profitable business in their arsenal. I think it earned $130 million in profit for the second quarter. The only reason they're losing money at all recently is iBuying, that is generating over half a billion dollars in annualized profit. The Premier Agent business in particular. At the new discounted price, the business is probably worth that much.

But if you ask me what happened to Zillow's 10-bagger potential, it's pretty much gone. Zillow, had 10-bagger potential as an iBuyer. I feel like it doesn't now.

Argersinger: Yeah. Something that you saw the numbers I'd thrown a screen which is if you strip out Zillow Offers, they're going to pull in about $800 million in EBITDA this year from those two businesses. To Austin's point earlier, they're laying off a lot of people are shutting down which are pretty capital-intensive business. Profitability, cash flow, assuming the housing market doesn't fall off a cliff in 2022. Zillow is going to do really well. The profits are probably going through the roof even if the revenue, the growth there is likely that great.

It's amazing but you could have a company that's all of a sudden, I think it's still trading for about seven or eight times sales right now. But probably not a huge premium to its profits or EBITDA at some point next year. In a way, Zillow has entered the value camp. Not a great place to be, by the way, over the last 10 years in the stock market. Any company that we began to say, I think from a value perspective, this is interesting investment.

Well, that's not been a great place to invest in this bull market. The multiples and valuations have been given to the companies that are really demonstrating incredible top-line growth with huge runways and Zillow in a way, to your point, Frankel, torpedoed that. What do you guys think? Let me ask Ant this question. It's trading a lower devaluations, it's going to be a lot more profitable. Zillow had a basically a fourth of its all-time high right now, bargain?

Anthony Schiavone: Like Matt said, it's trading at a big discount with its core business, very profitable, good business. But the thing that is still there is that question about management. The whole iBuying debacle where they shut it down saying that it was all operational thing and then it turns out they shut down for good. That's really the big question, Matt, is the management, the core business is still good. I don't think that demonstrating down iBuying is going to hurt their core business that much. Because in general, I don't think a lot of people actually know what iBuying is, a good general public, I don't think we have a huge impact on their core business. It could be a value play but the management issue still remains.

Anthony Schiavone has no position in any of the stocks mentioned. Matthew Argersinger owns shares of Zillow Group (A shares). Matthew Frankel, CFP® owns shares of Zillow Group (C shares). The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool has a disclosure policy.


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