Zillow Group, Inc. Z
Zillow's Premier Agent core is saturated, NAR lawsuits will compress commissions, Flex/Super App cannot replace it, and aggressive revenue recognition masks decline — shares worth $23-$35 vs $57.
Thesis
Spruce Point is short Zillow Group (NASDAQ: Z) after a forensic review arguing its Premier Agent MBP model has been flat since 2016, with web traffic decelerating and desirable zip codes long sold out. The October 2023 NAR/Burnett verdict is expected to unbundle buyer-agent commissions and could cut the industry commission TAM by up to 30%, directly hitting two-thirds of Zillow's revenue. Management's pivot to Flex, Enhanced Markets, and a 'Super App' is smoke and mirrors — a former Senior Executive called the app 'a glorified CRM,' Homes.com (CoStar) is a well-capitalized threat, and Flex books revenue when leads are sent, not when they convert, a practice Deloitte now flags as a Critical Audit Matter. With SBC of $451M exceeding cash from operations, dual-class voting control, and a departed CFO, Spruce Point models 40-60% downside to $23-$35.
SCQA
Zillow is the leading U.S. residential real estate portal (~214M monthly uniques) whose Premier Agent MBP advertising model — ~two-thirds of revenue — monetizes buyer-agent leads by zip code and trades at a ~6.2x sales growth multiple.
The October 2023 NAR/Burnett verdict will unbundle and compress buyer-agent commissions, MBP traffic and Premier Agent revenue per visit have been flat since 2016, Flex uses aggressive lead-based revenue recognition, Homes.com is capitalized to undercut on referral fees, and the CFO departed with no clear reason.
Investors should sell or short Zillow; management must disclose MBP vs Flex revenue, Enhanced Markets conversion rates, mortgage pull-through assumptions, and abandon the unrealistic 45% EBITDA target, while the board reforms its dual-class structure, clawback policy, and long-tenured independents.
Applying peer-adjusted 2.5-3.0x 2024E sales and 25-30x 2024E free cash flow multiples implies a $23-$35 share price versus $57.34, or 40-60% downside, with material further risk if Flex fails to scale or a restatement emerges.
The three reasons
- 1
NAR/MLS verdict will compress buyer-agent commissions ~200bps, hitting 2/3 of Zillow's revenue
- 2
Mature Premier Agent (MBP) saturated; Flex/Enhanced Markets are unproven and add earnings volatility
- 3
Aggressive Flex lead revenue recognition plus CFO departure signal inflated margins and ~6.2x sales multiple is unjustified
Primary demands
- Short Zillow shares; Spruce Point sees 40-60% downside to $23-$35 per share
- Demand additional disclosure: MBP vs Flex revenue split, Enhanced Market conversion rates, pull-through assumptions
- Question aggressive Flex lead-based and IRLC revenue recognition flagged in the new Critical Audit Matter
- Challenge governance: dual-class voting, long-tenured 'good old boys' board, no clawback, nepotism
KPIs cited
Pattern membership
Precedents cited
- Porch Group (PRCH) — prior Spruce Point housing-tech short, -97% peak decline
- CoStar's disruption of Apartments.com as template for Homes.com attack
- Zillow Offers iBuying failure ($881M 2021 loss)
- Trulia acquisition (2014) — missed 2023 revenue target by $3.7B
Composition what's on the 103 slides
Slide gallery ·
Notes
Classic Spruce Point short-seller deck: AI-generated cover image (suited agent + derelict house + rats + 'For Sale' sign) as visual hook, then 100+ pages of dense institutional template. Heavy reliance on a former Zillow Senior Executive interview quoted verbatim across 4 slides (pp.17-20) — a strong rhetorical device that gives the thesis an insider-source feel. Leans on track-record credibility via a prior Spruce Point short (Porch Group) on p.3 before the ToC — 'we've done this before in housing tech.' Uses CEO Rich Barton's 'Oh, my, so much blue ocean' earnings-call quote to mock growth narrative. Thesis combines fraud-exposure (aggressive Flex/IRLC revenue recognition, new Deloitte Critical Audit Matter, CFO departure), structural disruption (NAR verdict + Homes.com), and multiple-rerating (peer comp table p.102). No stake disclosed, as expected for a public short report. Date from filename 3-5-2024 and 3/4/2024 stock price reference on p.102.