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Zillow Wouldn’t Kill the Golden Goose

Zillow Wouldn’t Kill the Golden Goose

Where do I start? An easy place is that I was wrong.

I believed that, long term, Zillow’s outsized brand in the US residential real estate market would be a competitive advantage in winning iBuying customers. My thinking continued that while the Zestimate had its flaws, it would get better over time and allow for more accurate bidding, thereby reducing the capital risk of buying and selling homes. We’ll never know how this would have played out because Zillow abruptly exited the iBuying business.

CEO Rich Barton said that Zillow takes big swings and is willing to fail fast; for me, this takes failing fast to a new level. I believe that Zillow exited iBuying because they didn’t want to kill the golden goose.

A win for real estate agents

Zillow’s recent move is a win for real estate agents. I’ve heard from agents over the past year voicing concerns that the Zesitmate is not industrial strength and that the nuances of real estate require a human to price properly. Barton agreed with this assessment, saying the company had been “unable to predict future pricing of homes to a level of accuracy that makes this a safe business to be in.” A reality check for the accuracy of the Zestimate.

The debate about the future of iBuying is still on the table because Opendoor remains in the market. They’ll transact more than 20k homes this quarter, over 50% of the overall iBuying market (purchases and sales). Of course, as Zillow winds down their iBuying activity through early 2022, Opendoor’s share will increase sharply.

I believe home sellers want ease, speed, and visibility. iBuying remains a compelling product to meet those unmet needs. My long-term view stands beside the fact that iBuying took a step back with Zillow’s exit. Zillow’s exit is testimony that pricing homes is harder than it looks, which is a win for agents, arming them with a powerful message to their potential customers: don’t go the iBuying route, Zillow tried and failed.

Not willing to kill the golden goose

In the spring of 2007, I spoke with an Apple executive. The company had just announced the iPhone, and the spokesperson commented, we just killed our golden goose. The golden goose was the iPod, accounting for 55% of revenue in the quarter reported before our meeting. The executive continued, if we don’t kill the iPod, our competitors will do it for us.

As I listened to the Zillow earnings call and processed the justification for getting out of iBuying, I was torn between two thoughts. On one hand, I was thinking that iBuying will never work because the biggest brand in real estate has failed. If they can’t do it, no one can. On the other hand, I was remembering Apple’s comment from 15 years ago. I went back to the Zillow earnings transcripts from August and November to better understand why they pulled the plug and two things became clear.

  1. Zillow has always believed scale was needed to build a predictable iBuying business. They mentioned ‘scale’ ten times on the August call and eight times on the November call. The irony of the scale topic is that Zillow just gave Opendoor a clearer path to scale.
  2. Zillow didn’t want to destroy their core IMT business of selling leads to agents. Long term, Zillow Offers would have competed with the company’s IMT gravy train, which increases tension with Zillow’s only paying customers, the agents. The underlying message to these agents had been “we want to partner with you and eventually put you out of business.” The reversal changed that message to “we want to partner with you.” Barton’s comment that IMT is an “incredibly strong core business” underscores that it’s Zillow’s golden goose. And Zillow is not willing to kill the golden goose.

Great vs. legendary

I love the Zillow app. I check it more times than I want to admit. Zillow boasts 227m monthly active users, more than 2x higher than its closest competitor. I see the value of the company’s updated vision as a return to building a 40% EBDITA margin marketplace with new products around the core IMT business. They will work more with agents and third parties to expand the mortgage business and add escrow, title, and closing. Who knows, maybe even partner with an iBuyer.

While that vision will likely grow into a highly profitable business and reward investors along the way, it falls short of the DNA that legendary companies are built on, like the ‘bet the company’ culture that has allowed Apple to thrive over the past 20 years and Tesla over the past five. Zillow has chosen its path.

Disclaimer

Opendoor, Zillow
3 min. read Show less
Loup Frontier Tech Benchmark: October 2021

Loup Frontier Tech Benchmark: October 2021

For twenty years, the team at Loup has had a pulse on technology and a point of view on how that tech will change the world. The cutting edge of that change is frontier tech, driven today by AI, fintech, robotics, autonomous and electric vehicles, and virtual/augmented reality. We provide exposure to these themes through our partners at Innovator Capital Management. For more information click here.

Why Frontier Tech?

Frontier tech represents the forward-most edge of understanding and achievement in technology. By definition, what is frontier today will not be frontier tomorrow—it is dynamic. These are the technologies with the greatest opportunity to create value for investors

Performance

Below is the Loup Frontier Tech Index performance update as of the end of October:

What’s on our minds this month

LOUP’s performance for the month outpaced our QQQ benchmark, up 9.6% vs. the broader tech market up 7.9%. Recapping October, three topics are top of mind:

1) Coinbase was up 38% in the month of October as fears of inflation have moved shares higher. As a reminder, crypto is a hedge on inflation, and Coinbase operates the largest crypto exchange. We believe fears of inflation will continue into mid-2022 and shares of Coinbase will continue to respond well in that environment.

2) Affirm shares were up 37% in the month of October as the company continues to expand its reach with new retailers and partners. Most recently, Affirm added American Airlines to the buy now pay later platform. We believe the theme around monthly payments as the preferred way to buy remains in its infancy, with the potential to grow at similar multi-year growth rates as credit card growth a decade ago.

3) The video game market. In October, Facebook announced it changed its name to Meta to better reflect the company’s long-term vision of being a metaverse company. LOUP is invested in three gaming companies as an early way to benefit from the metaverse, which we see as a step function increase in the amount of time humans will spend computing. The first segment of monetization will be through games. While shares of Activision Blizzard (ATVI) and Nintendo were flat in October, shares of Take-Two Interactive (TTWO) increased by 15% in the month as the metaverse theme gains mindshare.

Changes to the Loup Frontier Tech Index

There were no changes in the month of October.

Top 10 Holdings (Weights as of November 1, 2021)

  1. Affirm Holdings Inc, 5.32%
  2. Rocket Companies Inc, 5.08%
  3. Aerovironment Inc, 4.74%
  4. Harmonic Drive Systems Inc, 4.71%
  5. Baidu Inc, 4.63%
  6. Galaxy Digital Holdings Ltd, 3.98%
  7. Coinbase Global Inc, 3.57%
  8. Teradyne Inc, 3.50%
  9. Overstock.com Inc, 3.37%
  10. Ambarella Inc, 3.34%

Weight by Theme

  • VR/AR – 32%
  • AI – 17%
  • Robotics – 16%
  • Fintech– 24%
  • EVs/AVs– 11%

Learn More

The Loup Frontier Tech Index tracks the performance of publicly traded companies developing frontier technologies including, but not limited to, AI, fintech, robotics, autonomous and electric vehicles, and virtual/augmented reality. We’ve licensed the index to Innovator Capital Management. For more information click here.

Register for our next Tech Roundtable with the Loup team, a quarterly webinar to discuss the latest in frontier tech.

Disclaimer

Markets
2 min. read Show less
Enjoy Tryout Passes the Test

Enjoy Tryout Passes the Test

The best way to understand a product or service is to experience it. That’s what Loup contributor Zheng Li recently did with the purchase of an Apple TV with Enjoy delivery and setup. The bottom line: it was a smooth process, better than to-the-door, and he would recommend Apple and AT&T customers give it a try. Loup is an investor in Enjoy.

A quick note on supply constraints

When Apple reported its September quarter, it cautioned that supply constraints, particularly around Mac and iPad, would mute sales growth in the holiday quarter. Despite this headwind, Apple still expects solid (around 5%) year-over-year revenue growth this period.

Apple is one of Enjoy’s four key customers and we estimate Apple accounts for less than 10% of Enjoy revenue today, given Apple is still in test mode with Enjoy. Putting it together, we don’t see measurable risk related to supply constraints, and if we’re wrong, we’d expect them to be transitory and likely resolve themselves over the next year. More important is the pace at which Enjoy expands its relationship with Apple. As a reminder, Enjoy started 2021 in 3 markets, expanded to 8 by mid-August, and by September 15, Enjoy worked with Apple in 14 US markets.

What is Enjoy?

Enjoy partners with premium brands, including Apple and AT&T, to offer a high-touch delivery, setup, and retail experience in the home. Think of it as the best elements of a store coming to you. We see Enjoy as a pure-play on experiential commerce at home.

The product

Zheng went to Apple.com and upgraded his Apple TV hardware to the latest 4K model.  The device came with a 3-month free subscription to Apple TV+ streaming, a timely addition to the product given the recently-released Foundation series.

The funnel

In the Apple purchase funnel, dates and delivery options are clearly noted. What stands out is the Enjoy delivery option does not have any branding associated with it, seemingly a vote of confidence from Apple related to the quality of the Enjoy experience.

The experience

After submitting the order, Zheng received a message about the appointment from Apple, including details that Enjoy would be doing the delivery and setup, along with confirmation of the date, time of delivery, and name of the Enjoy expert:

The Enjoy associate arrived on time in a corporate minivan, introduced herself and followed standard COVID protocols. The Enjoy associate unboxed the Apple TV and went over each item in the box. She switched out the old Apple TV and walked through the sign in with the Apple ID. Since Apple TV does not have cloud backup, the associate wrote down a number of apps that were on the previous box to install on the new box.

The upsell

Towards the end of the install experience, the Enjoy associate presented a code for an additional 1 month free of Apple TV+. She also presented the option to upgrade to Apple One and mentioned Zheng’s existing news subscriptions to The Economist and Wall Street Journal are included with Apple News. The Enjoy associate also offered a temporary user account to access the Apple Arcade and Apple Fitness TV.

Mobile warehouse

Toward the very end of the install process, the Enjoy associate inquired about additional Apple accessory needs. Zheng was missing an Apple extension charging cable for his office setup, which the Enjoy expert had in stock in the minivan.

Follow up

As the Enjoy associate left, Zheng received a final update from Apple asking him to confirm the delivery was successful, at which point the Apple Store link displayed a completed delivery.

Disclaimer

Apple, Enjoy
2 min. read Show less