Cathie Wood JUST Sold Out | Should You Too

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virtual brokerage met kevin.com exp hey

everyone meet kevin here so i'm a kathy

wood loyalist however i don't agree with

everything she says while i might agree

with most and i highly admire her and

respect her opinion there are definitely

some things i disagree with and i wonder

if kathy wood just made a big faux pas

or if she's doing the right thing

of course in this video we're talking

about zillow and the fact that kathy

wood bought zillow only to sell it a day

later for substantially less consider

this on november 1st none of kathy

wood's funds bought zillow despite being

down eight percent and kathy generally

being a by the dip buyer then november

second came right before earnings and

zillow did not make any announcements

yet about ending their home buying

business

and instead i made a video on zillow

talking about why it was likely that

they were pausing their home buying

business and therefore liquidating 7 000

homes i blamed what i believed was

management incompetence at zillow and

ultimately a failure to train employees

here's a clip when i suggested this was

exactly what was likely going on and if

you hire new people to try to value real

estate you're going to get unconscious

incompetence that people don't even know

that they don't know they're getting bad

deals and that is the perfect way to

bankrupt your company this is very bad

for zillow the next thing that's going

to happen is they're either going to

have to train this workforce properly or

they're going to have to fire or lay off

thousands of people that they just hired

and it is a sign of management and

competence i am concerned that the

executives at zillow do not know how to

flip homes

honestly i i would wonder if any of them

have ever personally fled properties i'm

not gonna bother looking it up because

it really doesn't matter

the proof is in the pudding they don't

know what they're doing

zillow then subsequently announced that

they were shutting down their home

buying business completely and laying

off 2000 individuals

but is this why kathy sold or is it

something else because take a look at

what kathy did and then we'll speculate

on potentially why she's bailing out of

this investment that same day before the

market closed zillow fell another 11

percent and then as expected kathy woods

by the dipping came in and we saw kathy

wood buy 288

813 shares in arc k her innovation fund

then earnings came out and after

earnings came out kathy woods sold two

million eight hundred fifty eight

thousand two hundred sixty eight shares

of zillow in rk six hundred forty eight

thousand in ark w the next generation

etf

394 thousand shares in arc after fintech

etf then the very next day sold another

1.329 million shares of zillow in rk

along with

462.2 000 in arc w it's clear now that

despite the fact that she bought the dip

before earnings

she sold and essentially liquidated

zillow

after earnings so what happened at

earnings well first

let me show you my reaction of what

earnings went down like oh zillow

tanking another nine percent

oh

oh

dang they're getting robbed

they deserve it whoa

what zillow shuts down home flipping

business

wait wait wait wait wait wait what

oh they just they

they're canceling it they're not doing

eye buying anymore

it's even worse than expected oh

oh it's it's a bloodbath

uh because remember they paused home

flipping

oh my god i called it i freaking called

it holy crap i did a video this morning

i'm like there's they hired so many

incompetent people they're gonna have to

fire these people holy crap the headline

just came through zillow to shut her

home buying business and lay off 2 000

employees oh

that's horrible for those people but it

just shows you real estate's not easy

okay now this is somewhat going to be my

speculation but i'm going to give you my

thoughts on whether or not i think kathy

would make made a mistake here or if

she's doing the right thing and to

understand this a little bit better

we're going to look at some select items

of zillow's earnings call and zillow's

investment financial report their q3

their calendar q3 financial report so

let's go ahead and take a peek at

exactly what those look like so first

this is the transcript of the earnings

call and it's worth noting a few things

first we're going to begin at the

beginning here there we go it's worth

noting a few things first zillow

management deemed that scaling up zillow

offers which was their eye buying

program where they would offer to buy

individuals homes and then fix them up

and resell them was too risky too

volatile and too risky for earnings for

the company which makes sense because

this company lost money hand over fists

trying to flip homes this is one of the

reasons in my real estate investing

course i highly discourage property

flipping it's a very low margin business

you have very low insulative wedge and

given the fact that you have to pay high

selling fees because real estate is

illiquid it takes a special expertise to

make sure that you don't go over budget

and it is very difficult to get out

profitably from while maintaining your

standards and doing things within the

scope of the law which means pulling

permits and doing things with licensed

contractors almost impossible to flip in

those sorts of conditions especially

since you got plenty of

do-it-yourselfers competing with you but

anyway zillow argues that there's too

much of a low return on equity and

therefore for the purposes of the

company they're going to stop doing i

buying which is where again they buy

homes they make people offers directly

and then they buy homes and then they

sell them

they mention that they wanted to become

a market maker not a risk taker and i'll

tell you that any real estate agent

could have told zillow that there's no

way they were going to become a market

maker like a citadel of the world

in real estate when you have to consider

that in america we sell six to seven

million properties every single year

zillow

at peak was handling maybe seven four to

seven thousand purchases per quarter

which annualized even if we took the

generous number of seven thousand times

four that would be under 30 000 homes a

year even if you 10xed it you'd still

only be buying 300 000 homes out of a

six to seven

million

transacted home market there's no way

you're going to become a market maker

you're someone overpaying for properties

because you've failed to educate your

employees on how to properly value

properties it's the big problem right

but anyway zillow makes the excuse that

zillow offers went through a period of

extraordinary circumstances like the

freezing of the housing market which i i

put a er here because i'm like really

like the housing market

didn't really pause much i mean there

was maybe like a month of uncertainty

and then real estate was off to the

races in april of 2020. supply and

demand imbalances have led home prices

to rise at a rate that was without

precedent well wait a minute

rising home prices are good for flippers

if you buy a home for today's price you

sit around for three months and do

nothing you should be able to make money

i literally did that i still got to make

a video on this property i bought a

property for for 970 000

i literally did nothing to it

nothing i was trying to i was trying to

get paperwork through the city and it

was a disaster

so i decided to sell the property and i

sold it for

1.13 million dollars so i sold it for

160 000 profit doing nothing

so

when zillow here says that we've been

unable to accurately forecast future

home prices at different times in both

directions by more than we model

possible i begin to question

management's competency beyond the fact

that i already questioned management's

competency when they hire two thousand

people without properly educating them

on how to value real estate folks it's

not that freaking hard i have a course

that teaches it but you don't even have

to go buy that if you don't want to

you'll learn a lot in it but i'm just

saying it's not that freaking hard to

value real estate you look at the comps

and don't overpay for crap don't use

cost per square foot on single family

homes you got to use proper comps

i could get into a different video on

this but to me it sounds like the

management here is complaining that oh

we we failed at flipping homes because

we couldn't predict what prices were

going to be in six months well folks for

the last

three four years that you've been doing

zillow offers i could tell you what home

prices have been three to four months

from now up they've been up

so the fact that you're complaining that

you weren't able to accurately predict

the future value of homes is a cop-out

it's and i think management is

literally showing they're incompetent

here because really what they should be

saying is we effed up we overpaid for

homes we went and paid more money for

properties than what the properties were

worth and now we're sad because we're

incompetent and we're losing money

that's what the real management is that

you have at zillow now don't worry we're

going to get into some more detail here

about the other aspects of their

business and then we're going to talk

about whether or not kathy wood made a

mistake so

uh they talked about because of price

forecasting volatility we also had to

reconsider what business would look like

look to me this is a bunch of bologna

okay it's a bunch of bologna so

let's now talk about the business that's

surviving

some of the other aspects going on and

then talk about cat if he made a mistake

so

zillow mentions that over the investment

period they expect their internet media

and technology business to increase

substantially in fact later in this

earnings report we'll see that their imt

business is expected to grow by about 13

to 14 per year this is the part of their

business that's actually profitable in

fact let's go ahead and look at just

that so if we jump in over here we're

going to see that homes revenue which is

right here this 1.186 billion is

obviously much less than the homes cost

of 1.422 billion that's because they

already started taking write-offs and

losses on some of the homes in this last

quarter that's because they're starting

to liquidate them but ignore that for a

moment instead look at what i've

highlighted in green this is imt you're

going to notice that 480 million dollars

of revenue is actually only matched with

cost cost of goods sold of 51 million

dollars that means they have an 89.3

profit margin on imt that's a really

smart business in fact one of the things

that i recommend to anybody who ever

wants to start a business is if you're

going to start a business you better get

into a high margin business if you get

into a low margin business you are going

to get reamed you're going to get

destroyed and you're going to fail and

look even zillow failed

look at the next segment they have 70

million dollars of revenue for mortgages

this is smart why is it smart because

it's a profitable business and they

their cost of goods sold or 21.7 million

that is a 69 profit margin that's very

very good on the left right here these

are profit margins and these are what i

call expense ratios so they're spending

10.7 cents for every dollar on imt of

revenue they're getting and they're

spending 31 cents for every dollar of

mortgage revenue that they're getting

okay good let's remove some of the blue

here and move on if we now look and

scroll down a little bit at their future

forecasted earnings and i used a

consensus from bloomberg analysts to

project this we expect zillow to have

somewhere around a four dollar earnings

per share in 2025.

if in 2025 they have about a four i

think it was four dollars and thirty

cents eps then their future pe at

today's stock price around 65 64

wherever it is right now 66 dollars is

somewhere around

15.3

and if we divide that by an approximate

assumed growth rate of 15

we get a peg ratio that's near one this

is actually really good this is what you

want to see when you're investing in in

a company you want to see a high growth

rate that matches some form of a future

p e ratio where it makes sense

uh to to invest in a low peg company so

another example of this might be tesla

very high future pe but massively high

growth rates for example tesla has a

future pe of about 60 but it has a

compounded annual growth rate expected

of about 50. that's pretty close to one

you want to be as close to one as

possible google is similar to this very

low peck apple on the other hand has a

relatively high

uh valuation so the top number's high

and the bottom number is lower which

makes the peg ratio much higher

basically is a way of saying that you're

paying more

per value of growth at apple than than

maybe uh what you could get at other

companies

anyway enough talk about other companies

when we look at zillow's core business

they have profitable business models

however they did spend

294 million dollars right here is that

line on sales and marketing and that's a

little bit of an issue because out of

the 550 million dollars of revenue 300

million going to marketing is a lot so

zillow's going to have to figure out if

they want to continue to grow at a 15

pace and actually get to four dollars in

earnings per share they're gonna have to

figure out how to spend less money

advertising

and more money focusing on their and

figure out how to get more revenue in to

their core competencies this could be

slightly difficult now i do expect

advertising expenses to go down because

i suspect a lot of this advertising was

spent on the home business it's trying

to attract sellers for their home

business

but if this advertising

item here goes down how much are we

going to see these upper businesses here

mortgage and imt go down as well and

that remains to be seen there's a lot of

uncertainty with how resilient do these

two segments of the market are going to

be

without zillow homes now we expect it'll

be much like it was in 2018 or 2019

before home revenue was really coming in

and look there the company was actually

doing decently it was growing its imt it

hadn't started mortgages yet but its imt

was growing and there was potential

however i do have some concerns

about how the company is trying to get

revenue through their imt business see

back in the day when agents used to

advertise on zillow premier agents by

the way are the one of the biggest ways

that zillow makes money these are real

estate agents who are trying to find

buyer and seller leads right this is a

very high profit margin business as well

but anyway this particular business is

is very profitable and real estate

agents will pay to have their

information listed on zillow and back in

the day you used to go to zillow.com and

you would pick uh a property web or

whatever property link and you would be

able to see three or four different

agents that you could then click on

their pictures of and then contact that

agent to get information on the property

now you actually don't see any agent ads

up here anymore all you see are these

buttons for contact agent and take tour

so if i click contact agent i just throw

in my information blindly here and i

have no idea where this is going i don't

know if this is going to the listing

agent to an agent that's pictured but

there's no agent picture the same thing

with take tour i have no idea who this

is going to and that's because zillow is

trying a new model and this is what

you're investing in if you're interested

in zillow they call it zillow 2.0 it's

kind of like uberizing real estate think

about going to uber on your phone and

clicking i need a ride to get from point

a to point b you don't really care who

the driver is you don't really care what

they look like you don't care what their

personality is what their expertise is

what kind of car they're driving is when

you use a regular uber you just care to

get from point a to point b

unfortunately in my opinion that does

not work in the real estate business

zillow is trying to uberize contacting

agents and what they're doing is if you

fill your information into this form

they will automatically send it to an

agent they deem who pays them by the way

they deem to have a high response time

high reliability and is somebody who's

able to drop everything and go show you

the property now they will if you scroll

down further

if you go past all this junk and you get

all the way to the bottom of zillow over

here they do pay homage to some of the

old school

zillow tactics that they had i'll hide

myself here for a second and this is

where look your personal guides get to

know the neighborhood find an amazing

local agent to set up tours give advice

and negotiate with sellers this is how

real estate should be done people should

find an agent that they believe is a

professional whom they believe that they

can actually uh you know work with have

a connected personality with and is

going to be somebody who's going to look

out for their financial interests

because a real estate agent is much more

than somebody who's just trying to find

you a home dude everybody can find a

home finding a home is not that big of a

deal right now but you've got to have an

agent who's going to look out for you

get the proper inspectors to make sure

they're a second set of eyes to advise

you on on real estate financial

situations there are a lot of things and

i'm not saying that all real estate

agents are great don't get me wrong we

can make a whole video on that but i

have a lot of faith that a good real

estate agent can make somebody a lot of

money i know this is true

and of course a bad real estate agent

can lose people money right but the

point is if you're investing in zillow

you are investing in these people

wanting to advertise on zillow as a

premier agent so if i click on this

person they are not listed as a premier

agent they are not advertising so you

can actually go through different areas

here different regions and see who's

advertising see this person zillow

premier agent this person is paying

porchlight realty team

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but anyway back to zillow so you can see

if somebody's a zillow premier agent now

this person it probably makes sense to

be a zillow premier agent because if

somebody fills out that contact form on

the property website this person's got a

whole look at this 77 members he's got a

whole freaking office of people who

could respond tons of people here

without reviews i don't even know if

these are real people but i mean emma hi

emma you're caitlin tiffany these these

they look like very nice people who want

to take care of you as well as randall

and nade and these other folks as well

alex rebecca right just saying like

there are a lot of people oh my gosh who

were really uh apparently ready to help

this person sell real estate which which

is great uh and that's sort of that

uberization of real estate right

and so the question is do you think that

this is a better model of advertising

or

is it better for somebody like what what

is what would you rather do is do you

just want somebody to unlock your door

for you if you're looking for a real

estate agent you want to get assigned a

random uber style real estate agent or

are you going to go to yelp go to san

diego and type in real estate agents and

are you going to scroll through people's

profiles and their expertise and what

they say and try to determine who's

right for you is it going to be arlo is

it going to be mike and jess how about

bruce or daniel beer dude that guy's

last name money uh colleen whatever

right here you could pick jake if you

want somebody without a picture or are

you going to pick kimberly i don't know

maybe you're going to pick kimberly

schmidt or

you know chemo who's who's half covered

by an open house sign i don't know

but

the point is

oh there should be ads on here as well

yeah uh i think these are ad oh

sponsored results i think i'm not sure

they actually make this a little

difficult special offers free i think

these are the agents who advertise so

arlo must advertise and he's also

no he's the sponsored result they make

it actually extremely difficult to tell

which one is sponsored and which one's

not i think they do that on purpose i'm

guessing it's these three

anyway the point is

i personally think

having a full disclosure having been a

real estate broker for 11 years that i

would much rather advertise myself on

something like yelp where i can show off

me my videos the services that i do the

education that i can offer somebody

rather than just being some scumbag

who's going to answer the phone to any

rando who calls in on zillow you could

go oh oh yep you want to see that house

yep oh i'll travel it over

like i'm not a door opener as a real

estate broker now i don't do real estate

sales anymore so i'm not trying to

minimize uh the importance of somebody

going to open the door for you and

individuals having the opportunity to

have the door open quickly for them

redfin does that model as well and i

invest in in redfin but the point is

in my opinion

you when you when are investing in

zillow you are not investing uh in the

next six months which are going to be a

disaster because they're going to be

liquidating these properties between now

and the second quarter of 2022

maybe the first quarter of 2022 so

you're really not going to see good

profit again probably until the third

quarter of 2022 which is fine if you're

going to invest in zillow at the dip

right now you need to know that but what

you've got to understand is the

advertising business that you are

investing in has changed it's not the

zillow that it used to be the zillow 2.0

in my opinion is less desirable for real

estate agents to advertise with on top

of that i thought zillow was very smart

getting into making lease contracts for

people and handling property management

for people by allowing folks to pay to

advertise properties on zillow for rent

but take a look at this

rental revenue also underperformed our

expectations as we incurred headwinds

related to high rental occupancy rates

which tempered advertising in other

words if stuff is flying off the shelf

fast people don't got to pay for

advertising you've got to ask yourself

that about real estate agents as well i

know a lot of real estate agents are

looking for leads but is zillow going to

be the high convert way to actually get

those leads

and so if you're an agent i'd like to

hear from you what you think i've talked

to a lot of agents about this and a lot

of the agents i talk to don't like the

transition that they're seeing with

zillow now they're not trying to all in

bag on zillow here but let me tell you

this i'm very frustrated by a few things

one

i don't trust them i don't trust them

because they're not being honest about

why zillow offers failed zillow offers

didn't fail because they couldn't

crystal ball what future home values

were going to be they're in an

appreciating market

it'd be one thing if oh the market

crashed we got screwed it didn't

the market boomed and you sucked you

sucked during boom time like if you suck

in a recession

okay like that happens that's what

bankruptcy's for

you suck during boom time you just

straight up don't care like that's bad

anyway so when they suggest that their

imt segment is going to grow at 13

year-over-year growth i'm actually not

that excited about that i don't really

care that you grew 50 from q4 2019 i

don't care i want to know going forward

and 13

isn't that great now has the stock been

discounted to where maybe peg wise that

makes sense sure peg ratio wise makes

sense but you're still trusting in this

management team to execute on that 13

growth rate otherwise they're going to

miss now i do think they're going to

have massive negativity between now and

the middle of next year and they will

grow again in the future zillow's not

going to go away anytime soon so it's

not like i think if you invest in zillow

your money is going to go down the drain

i personally do think there are probably

better opportunities to invest in i'd

much rather invest in the companies that

i really do invest in big time which

honestly in the real estate space expi

real estate that is totally under looked

in my opinion in the real estate world

redfin in my opinion is a better option

than the zillow thing here because

rather than trying to uberize real

estate agents redfin actually trains

their agents because they hire their

agents and they use agents in-house so

they actually have training protocols

rather than just using any random real

estate agent out there

so i don't know if you can trust their

guide which is a concern of mine i

really don't care about the showing time

platform that they keep talking about i

don't care about 3d scans look i love 3d

scans i love matterport but i don't

think it's like a profitable driver of

growth for zillow

i do think their mortgage business could

be very interesting but look at this we

expect mortgage segment revenue to be 47

million to 57 million which is down

sequentially from q3 and it reflects

slower industry refinance activity from

recent moves and interest rates so their

mortgage business is slowing down look

other mls's are doing showing time

platform crap like no nobody cares

uh then here we go they reiterated again

the co-founder and ceo

we were fundamentally we have been

unable to predict future prices of homes

to a level of accuracy that makes this a

safe business to be in

wrong you're an idiot

total idiot to say that or you're lying

it's not that hard okay the real estate

cycle does this that's what the real

estate cycle does if you want to buy

good deals you buy them below whatever

the hell the market is doing

this right here is called your

insulative wedge okay so if a house is

worth 500 000

right here and i can buy it for four

hundred thousand dollars right here even

if the market falls i'm still more

insulated than the next guy i'm sitting

in the toilet for less time

than the guy who's buying it up here

who's sitting in the toilet a lot longer

he's underwater that much longer right

that's why you want to buy wedge deals

that's why i have a course on buying

properties under market value and that's

why i get very frustrated because i do

feel very passionate about the real

estate industry when you have a co-ceo

or co-founder and chief ex and the ceo

in my opinion lying about what the hell

went wrong they effed up they didn't

train their workers it's that freaking

simple and it's not a 3d touring system

that's going to make zillow any better

of a company to invest in so with all of

that said did kathy wood make a mistake

dumping

in my opinion the answer is no i think

kathy did a wonderful thing here i

supported 110

and i'd much rather take all the money

out of zillow and plow it into something

like nano dimension because i think

they're equal yolos except nano

dimension has way more upside okay just

kidding i'm not going to actually invest

in nano dimension it had a lot of

momentum movement i know that kathy

would invest in it i personally okay

i've made many videos on intervention

i'll give you very very quick i don't

think that 3d printed circuit boards are

going to reach any kind of mass

manufacturing scale anytime soon that's

what the ceo envisions i don't agree

with that model i'm just making a

comparison that i'd kind of rather be in

something that i don't really like than

zillow and again i'm not saying the

stock price is not going to go back up i

do think there's a lot of massive

uncertainty and fear around this company

right now

i just don't like their business model i

can't personally support them you might

look at this and go uberization of real

estate temporary pain perfect by the dip

opportunity for me to get into the

uberization of real estate then go make

money i'm all for it i think the growth

rate will be stunted but we'll see and

we'll see how management executes those

are my two cents thank you very much for

watching this video check out the

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