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Real-life ‘Big Short’ investor is betting on Zillow’s decline


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The renegade investor portrayed in the 2015 flick ‘The Big Short’ by Steve Carell is now betting against… Zillow.

Steve Eisman, the short seller best known for betting against collateralized debt obligations on residential mortgages immediately before the 2007 housing crises, took a short position on Zillow. In an interview with The Real Deal, Eisman said he believes Zillow is struggling to recover from the stagnation of its home-listing business.

“Basically what was happening was Zillow got to a very large size for its platform,” Eisman told The Real Deal. “Growth was slowing dramatically. I thought there was a lot more competition for the platform and so I thought the growth in the platform was really just going to continue to slow.”

Steve Eisman | YouTube Screengrab

Shorting a stock means borrowing shares of a company from an existing owner and then selling the borrowed shares at current market price with the expectation that prices will drop. With the housing bubble, banks had given out mortgages to homeowners who expected their properties to go up in value but, when interest rates rose, saw prices fall and often ended up defaulting on their loans.

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Eisman, who was able to foresee that banks were handing out loans to customers that wouldn’t be able to pay them back, was played by Carell in the Oscar-winning film “The Big Short.” Since the financial crisis, he has moved on to work as a portfolio manager at the investment management firm Neuberger Berman and currently shorts banks like Barclays and TD Bank.

Zillow, which launched its IPO in 2011 and acquired StreetEasy for $50 million and Trulia for $3.5 billion in the following years, saw its revenue grow fast, tallying $645 million in 2015 — a 98 percent increase from 2014. But last year, Zillow’s revenue grew by only 24 percent to $1.3 billion while its stocks fell after peaking at $65 per share in July of 2018.

As a result, some investors believe that Zillow has passed the peak of its growth as a company and will fall in value as it struggles to grow. According to Nasdaq data dug up by The Real Deal, investors have shorted $1.27 billion worth of Zillow’s stock while short positions in Zillow account for 21.7 percent of stock available to trade.

So far, the prediction has not been accurate — as Zillow unrolls its Zillow Offers home-flipping program in more cities, its stock has also recovered and been picked up by new investors. Some believe that the iBuyer model is used by only a small portion of homeowners and will not be enough to offset the stagnating standard model while others argue that it is only growing in popularity.

Brad Berning, the senior research analyst at Craig-Hallum Capital Group, told Inman that in markets like Phoenix 50 percent to 70 percent of homeowners get a quote from an iBuyer before they sell, which ultimately drives Zillow’s popularity as one of the largest traffic generators among sellers.

“I think this a newer business model that will have volatility along the way,” said Berning, adding that he expects Zillow’s stock to continue to rise with time. “The amount of traffic that [Zillow] gets to their site should put them in a leadership position to be one of the dominant winners from a lead-generation perspective.”

Zillow declined to comment on Eisman’s predictions but redirected Inman to its May earnings call, in which CEO Rich Barton said that he has “high expectations” for the company’s economics model.

“We must show you that we are not just buying dollars for $0.95. The unit economics of Zillow Offers are justifiably under the microscope,” Barton said at the time. “But even at small start-up scale, the economics show promise. Of course, we will gain efficiencies from here as we gain depth and density in markets.”

Still, those like Eisman believe that Zillow will ultimately struggle due to overly inflated confidence in iBuyer success.

“If you’re bullish on the stock, you’re really bullish on the iBuyer model,” Eisman said. “I think a big execution challenge is, can they make that model work while trying to turn around the core business that had slowed? In our view, the opportunity is there but the execution is not going to be easy.”

Email Veronika Bondarenko

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