When Zillow (Z) announced their earnings yesterday, they challenged one well-worn cliché in pursuit of another. It is often said that you cannot go back, but with the current CEO Spencer Rascoff stepping down to make way for former boss Rich Barton, it seems that Zillow is doing just that.
Barton, a co-founder of the company along with Lloyd Frink, a partnership that also “founded” Expedia (EXPE) when it was spun off from Microsoft (MSFT), will take over again at a time of big changes for the company. Zillow is known as a property search site but has recently made moves into buying and selling homes as well as mortgage generation.
The stock responded positively to the news, it is up over six percent in early trading this morning from yesterday’s close, but is the change significant for investors?
The short answer is yes. When companies are undergoing drastic changes, a recognizable, trusted figure at the helm is an important asset. For evidence, I give you Apple (AAPL).
Of course, it is possible that Apple would have gone on to the massive success it achieved without the reappointment of Steve Jobs as CEO, but it is hard to imagine it without him.
As you can see from the chart below, trust matters to Zillow right now. The news that it had purchased Mortgage Lenders of America last summer was, shall we say, not well received by the market:
That news is not the only reason the stock dropped nearly sixty percent from its high in the second half of last year, but it was the most important one. A generally softer housing market and a drop off in its main revenue source, advertising by real estate agents, also contributed but investors were obviously worried that by moving into flipping properties and providing mortgages, Zillow had bitten off more than it could chew.
However, there is another cliché that applies here: in business, if you aren’t going forward, you are going backwards.
Barton, with his experience at Expedia, knows that better than most. Tech disruptors can quickly achieve a dominant position in a market, but they are always vulnerable to competition, and for a company whose success is built on rapid growth, standing still is simply not an option.
Moving into buying and selling properties and mortgage generation is risky given the cyclical nature of the real estate market, but it plays into a well-known trait of consumers: they're lazy.
We like one-stop shopping even, or maybe especially, when it comes to major purchases. There is a reason most car financing is done at dealerships, even though the cut they take from financing deals makes it likely that buyers could get a better deal elsewhere. It's all about convenience.
We all like to think that we are rational economic actors who search diligently for the best deal on everything but, in reality, we will often sacrifice economic efficiency for an easy transaction. Searching for a home on Zillow, then buying from them with a mortgage arranged by them may not be the best available deal from an economic perspective, but the company is betting that it will appeal to enough buyers to make it work.
I wouldn’t bet against them.
The earnings report showed a slight beat on both the top and bottom lines, but not enough to justify the big jump in the stock. That looks to be a reaction to the return of Barton at a critical time for Zillow, and that suggests that investors will give him time to enact the changes.
Major changes to a business model usually result in turbulence in a stock but now, with that seemingly behind us, taking a chance on Zillow’s success looks like a decent long-term bet.