“The Myth of Zulia” (Citron)

Notes from the Value Investing Congress

By Travis Johnson, Stock Gumshoe, September 9, 2014

These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.

Citron Research is a well known and aggressive short selling/research group run by Andrew Left — his firm is about 13 years old, used to focus on fraud.

“Being right and wrong at the same time” — Zillow is a terrible business, but the stock went from $27 to $100

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Zillow makes money 65% from premier agent revenue, 21% display ad, 10% mortgage.

Zillow has a lot of traffic, but they don’t own listings — they get syndicated listings. Listing agent can either pay Zillow to be the only agent on the page or see several other agents next to her sucking up leads. That’s most of the money, agents hold their nose and buy the premier agent slots because the alternative is worse.

Their market is mostly the big brokerage firms — Realogy, Re/Max, Berkshire Hathaway, and the independents (independent local brokers are about half the business).

He dislikes the company and business model, but you can’t know when it’s going to change (it’s better to have a short when you don’t need change). Zillow needs a point where brokers change their mind and the business gets worse. So what changed in the last few months?

There’s been change — in a deal disclosed by Realogy, where they got a dramatically better deal with Zillow and Trulia and the others (Realtor.com, etc.). What’s this deal that’s so much cheaper.

August, “Beware Zillow” on cover of Barron’s — they discuss that Realogy deal. Realogy is 23% of all listings, so that’s now inventory that Zillow can’t sell (and has already sold much cheaper).

Zillow CFO says “his company would renegotiate bulk pricing if many brokers tried to imitate Realogy’s Fab Plus deal.”

Company complained about short selling information, but also has more insider selling than you can imagine.

Left thinks the story ends there, the other brokerage firms demand the same pricing. He starts looking at the other firms.

He thinks they have a deal with Weichert, listing agents are getting top treatment without being “premier agents”. Same with Long and Foster, all the listing agents are protected.

So they must be selling at a discount to these listing agents, but ...

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