Zillow, a key investment of Will Vicars’ Caledonia and the Packers, could be more profitable, founder Spencer Rascoff says

Despite Caledonia’s bullish view, Zillow co-founder Spencer Rascoff told The Australian Financial Review the housing market’s troubles were an overhang on the stock, and it could be “significantly” more profitable if it shifted strategy.

Zillow has acknowledged the impact of the property market’s woes. CEO Rich Barton said on the company’s results call last month: “This is having a more pronounced effect on sales volumes during the typically strong summer moving season.

“We’re navigating well through a tough housing macro environment that is not in our control.”

Caledonia invested hoping the company would repeat the success of Australian real estate platform REA Group in a much larger market. In 2013, Caledonia circulated a presentation noting Zillow’s enterprise value of $US3.1 billion was similar to the size of REA Group, despite Zillow serving a market in the US that was 20 times larger. “Zillow [is] on the same trajectory as REA,” Caledonia said in a note to its investors.

Mr Rascoff sold down his stake in the real estate platform after leaving the board in 2020. He maintains a small position.

“The stage [Zillow] are in today is one of … trying to squeeze incremental margin improvement. It’s not as high growth,” said Mr Rascoff, who is now focused on promoting his AI personal assistant start-up, HeyLibby.

“Real estate also has fallen out of favour as mortgage rates have increased and investors have become more concerned about proptech. So, those are two of the reasons for the headwinds that Zillow has faced over the last couple of years.”

Stockpickers encouraged

Mr Rascoff said it was a “fair question” as to when the company would start making more money.

“Zillow could be significantly more profitable than that if they chose to be,” he added. “If they decided to invest less in new initiatives, they will get more profitable. They’re deciding to balance profit growth and innovation investment, and that tempers near-term profit growth.”

Still, Caledonia’s stockpickers told the investor meeting they were encouraged by a number of other factors which analysts were not accounting for. These included higher customer transaction rates in markets where they were testing new products, and the company’s June launch of a “listing showcase”, which allows users to boost the appearance of their listings.

They believe these changes will result in a rise in earnings over the next five years and that the company’s costs are plateauing. The presentation was in response to Zillow’s results and to update investors on their own research into the stock, sources said.

Shares in Nasdaq-listed Zillow soared to more than $US200 in 2021 but fell to just $US27 about a year ago, wiping billions of dollars including from Caledonia, one of Australia’s largest hedge funds. It has since recovered and closed at $US51.40 on Monday. Zillow reported a loss of $US35 million ($54.5 million) for the second quarter. That compares to a profit of $US8 million in the same quarter last year.