Zillow Group - A Lesson on Human Capital

Psalm Chapter 19 verse 14 states, "May these words of my mouth and this meditation of my heart be pleasing in your sight Lord, my rock and my redeemer."

Life is fraught with difficulty, no matter how great one's life may seem or actually be. For me, I find peace and comfort in looking to God during these times as there's no clear answer, one that I will accept anyways, that can assuage the situation. When all else fails, God does not.

Time is the greatest equalizer as it inevitably leads to transparency and clarity. Just as time has taught me my need to depend on God during life's circumstances, it also leads to more clearly displaying winners and losers when it comes to market competitors.

Today Zillow Group (ZG) finished the day down over 9% which was strictly unique to this past Sunday's news. The news, simply put, Zillow has essentially hit its capacity to compete in the iBuying home selling market for the remainder of the year. Specifically, Zillow will no longer be acquiring new homes, but rather will be looking to focus on liquidating its current inventory.

This is very interesting as during the initial peak during the pandemic in 2020, this was the logic for all iBuying peers. Today's move is more indicative of Zillow's inability to transition quick enough to the iBuying opportunity, notably from a labor stance, especially with respect to pivoting from its legacy business model. This leaves nearly a full quarter for competitors to continue scaling at Zillow's expense, with the leader Opendoor Technologies (OPEN), being the biggest benefactor.

I've been a strong proponent for Opendoor, being the home sales iBuying market leader. Today was a pivotal point in seeing the first indications of how an innovator is able to outperform its legacy peers. Opendoor was up as much as 6% today before finishing up over 3%. Over the past six months, the diversion from prior correlation with Zillow has been stark.

As Zillow has attempted to adjust to the iBuying market, it is still focused on its legacy Premier Agent and Mortgages segments totaling 50% of all Revenue. While Zillow couches this as simply a labor issue associated with the process to digitally purchase a home and resell it, it goes much further than that.

This gets more directly to the broader competition of new innovating companies and their legacy/incumbent peers. It all boils down to human capital on two fronts. First, companies like Zillow are not capable of forgoing their legacy business segments, that in turn, takes away from resources for competing newer segments. Second, top talent as well as overall talent for newer innovative areas are less likely to have a strong incentive to work at legacy competitors because of the first point. This is especially the case for leading human capital talent as legacy opportunities tend to naturally restrict innovation and momentum towards progress.

Human capital is also not about restructuring and "evolving" as much as it is about nimble and laser-focused teams within companies that hit their stride from top to bottom. No company is entirely perfect, but management is critical in setting the pace, that leads to an organic increasingly amount of labor demand.

When I look at Opendoor and Zillow, Opendoor is clearly the company to own for the future as the former continues to pour every penny into the massive home sales iBuying market. There are a lot of sectors and industries out there in a similar position with clear legacy/incumbents versus innovators. Zillow's inability to go through a full year of a booming real estate market to grow its iBuying segment should give investors pause on simply assuming any company can pivot to the next major growth opportunity.

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