Amazon 2.0

Investment Analysis Clubs Saul’s Investing Discussions
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I was an investor in Amazon back in the day, when they had a market cap around $6 billion. It was a fun, amazing ride. It went way, way, way up and way, way, way down. The negativity, the shorts on the company, the whole damn market crashing.

I sold out of my Amazon, along with all my other stocks, as I was making a career change and going all-in on my new venture. That venture was a lot of fun but financially was kind of a disaster. And that damn Amazon is now a $920 billion company.

My investment was small. Maybe $4000? Anyway, that 153-bagger would be worth $612,000 today.

Yikes.

The good news is that it’s happening all over again. There are at least two massive retailing opportunities where Amazon does not compete, and will not compete. These opportunities are too big for Amazon, and too difficult. They’re not even going to try. And yet, my strong opinion is that the internet will rock these markets, sooner or later.

The opportunities I am talking about are in cars and houses.

The TAM in both areas is measured in the trillions. That’s a big market opportunity.

And I do not think there will be multiple winners. I think there will be one winner in automobiles, and one winner in housing. And the networking effect means that #1 will dwarf everybody else.

Maybe it’s too early. But I’m going to call it now.

The company that I believe will be the Amazon of auto sales is Carvana.

And the company that will be the Amazon of housing is Zillow.

Understand this is retail, so the margins are going to suck. The companies are going to be unprofitable for years. On the other hand, the revenue growth is going to be astronomical. And predictable. And the markets they are attacking are too damn big to measure.

Carvana has been a great stock for us. We’ve held it about a year, and have been adding along the way. Already made twice our money. There’s a huge amount of negativity against the company. The short percentage of float is now 51%.

I suspect a lot of our short-term gains are due to short squeezes. This, of course, drives the bears crazy. “The only reason the stock is going up is because the shorts are getting squeezed. Nobody would buy this damn company! I’m going to short it again. This is crazy.”

What it is, is Amazon, all over again. I’m getting deja vu up the wazoo.

We just bought Zillow yesterday. Just a nibble, just putting our toe in the water. You don’t actually have to buy a lot of shares if you have a long-term investment horizon and you have a legitimate shot at a 100-bagger.

Zillow has not had the wild gyrations (yet). Nor does Zillow have a high percentage of short interest (yet). But both of those things will happen as revenues escalate. Will revenues escalate? Oh my. Yes they will.

Zillow had $1.3 billion in revenues last year.

A tiny percentage of that ($52 million) was from Zillow Offers, which is a new venture that involves Zillow offering to buy your house. The company’s forecast is that this $52 million in sales will escalate to $20 billion over the next 3-5 years. That’s the sort of revenue escalation that gets bulls snorting and bears sneering.

Already Forbes and Barron’s and The Wall Street Journal are calling Zillow a “house-flipping operation.”

No. You’re missing it. You’re wrong.

The real estate market is shifting on-line because it’s easier, faster, and smarter. There are a lot of people who would like selling a house to be simpler, easier, and less of a hassle. People want it quick and easy. What if selling a house could happen a lot faster, like selling a stock?

Why not?

What’s happening right now is that Zillow is completely shaking up the traditional realtor market. Gary Keller, the CEO of Keller Williams, announced back in January that they are going to start making offers on homes as well. “I feel like I have no choice now,” Keller said. “I can’t allow Opendoor or Zillow to go out and be the only play in the iBuyer space and then begin to dictate terms and build brand around ‘they buy houses’.”

Great article here:

https://www.curbed.com/2019/3/21/18252048/real-estate-house-…

Zillow’s earnings call with investors in February caused a bit of stir in the real estate world because it offered a startling glimpse into how an industry giant plans to remake itself, with the Zillow Offers program at the center of that transformation.

Zillow’s CEO is Rich Barton. He was working for Microsoft back in the day. And while he was there, he started Expedia. And then he started Zillow. And then he started Glassdoor. So I am kind of a fan of Rich Barton. Anyway, his dream is to make Zillow the Microsoft Office of real estate.

https://www.geekwire.com/2019/zillow-ceo-rich-barton-wants-b…

I love the ambition. They are shooting for the sky.

Market cap of Carvana now: $10 billion
Market cap of Zillow now: $8 billion

Let’s check back in 2024 and see where we are!

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SaintCroix,thanks for bringing Carvana to the boards. I’ve never heard of it. (My favorite retail disruptor right now is Stitch Fix, btw.)

Reading more about Carvana:

Website: https://www.carvana.com/
IR Website: https://investors.carvana.com/
Ticker: NYSE - CVNA
Market Cap: 9.92B
IPO: April 2017

Latest earnings call transcript (Q1 2019):
https://www.fool.com/earnings/call-transcripts/2019/05/08/ca…

And I do not think there will be multiple winners. I think there will be one winner in automobiles, and one winner in housing. And the networking effect means that #1 will dwarf everybody else.

I don’t think I agree with this. Just one winner? That’s not how retail markets typically work.

Karen

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re: Zillow, the Fool has been following Zillow for years. For me personally, it was one that I toe-dipped in, but didn’t hang on to. Some companies are like that for me, they just don’t stick for me. (And it looks like my decision to let go was a fine one.) But I’m willing to take another look at it.

51% revenue growth and Zillow Offers does sound interesting!

https://www.fool.com/investing/2019/05/14/zillow-group-reven…

Thanks for bringing it up,
Karen

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Saint Croix,

If you look to Amazon and try to make comparisons to Zillow and Carvana, I would think about some things. You said Amazon went from a $6B market cap to $920B market cap. Is you logic that Amazon did that so another company in an enormous company can do it too? Zillow and Caravana seem to be the leader and probable winners in their markets so their market caps will increase by a similar factor? There are some things to think about that are not comparable:

  1. Amazon built AWS which is a one of a kind opportunity (well, others like MSFT and GOOG are trying to built their own versions). But to think that Carvana and Zillow could ever have anything like AWS…not going to happen. So how much of Amazon’s market cap is AWS? I’d say a pretty big chunk of Amazon’s current market cap is AWS.

  2. Amazon started with books and now is the biggest retailer for just about everything. This explains the huge increase in market cap.

  3. Amazon’s customers come back over and over again which gives Amazon hordes and hordes of loyal customers. Home purchases and car purchases are once in a blue moon purchases. This means that Caravana and Zillow’s customers will be essentially new with each transaction. They won’t really benefit from repeat purchasing. This also means that these companies won’t benefit from many of the things that adds value to Amazon: collecting lots of data on their customers, using this data for advertising purposes and to further build on their competitive advantages, adding a shipping and logistics business, adding many new products that enable more collection of customer data, habits ,etc that further increase competitive advantage. Caravana and Zillow will have none or very little of these benefits.

  4. The car market is probably going to shrink in the next decade. a) electric cars will expend the useful life of cars making their purchase less frequent, b) people are migrating from the suburbs to the cities making other modes of transportation (walking, biking, public transport) more utilized, c) ride sharing is increase which will require fewer cars, d) the young generations (millennials and GenZ) prefer not to own cars…I know many who aren’t even getting their drivers licenses. These changes make me shy away from investing in anything to do with automobiles.

Chris

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For reference, here’s a long thread on Carvana from back in January:

https://discussion.fool.com/carvana-cvna-34120271.aspx?sort=whol…

Karen

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Great dialogue here…

I have invested and profited from Zillow in the past (and also Amazon in the past).

There is Redfin ahead of Zillow in buying and selling houses (at least in terms of time to market lead… may also be in overall revenue, I haven’t checked lately).

I agree with both sides of the argument… however, at the end, if you can invest in much higher gross margin, stronger hold on the customer and recurring revenue businesses with very high headroom to grow - like MDB, AYX, TWLO, SHOP, SQ and such, why would you want to invest into lower margin, no hold in the customer, one time business type of markets like car and home shopping?

I was getting interested in Lyft and Uber but even there, unless they can stabilize market and pricing to a point where they can generate enough value, it is hard to invest into because of lack of hold on customer (i.e. no switching cost).

I am actually more interested in SFIX… it has potential to build high competitive moat that can reflect into revenue and earnings growth… the challenge is that it seems to have become a niche… revenue growth doesnt reflect large available market.

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Amazon built AWS which is a one of a kind opportunity (well, others like MSFT and GOOG are trying to built their own versions). But to think that Carvana and Zillow could ever have anything like AWS…not going to happen. So how much of Amazon’s market cap is AWS? I’d say a pretty big chunk of Amazon’s current market cap is AWS.

I actually think Amazon Web Services is under-valued by the market. It’s hidden within the dominating retail presence. I wish they would spin that damn thing out. Amazon’s PEG is 0.72. And their P/S is 3. Berkshire Hathaway is buying Amazon, that’s how damn cheap it is.

I think most of Amazon’s growth (now) is from AWS, and a lot of their profit margin is from AWS. It’s interesting to speculate what kind of stock monster Amazon would be if all they had was the retail business. I’m of the opinion almost all of their market cap is due to the retailing business. Spin out AWS, and let’s so what kind of multiple that high-growth, high profit margin business would get from the market. Let’s put it this way–this board would be very excited about that AWS ipo.

What you are suggesting is that Amazon the retailer was not a monster stock, and AWS saved their ass. I can see why you think that way, but I fundamentally disagree.

Wal-Mart had their IPO in 1970. Intel had their IPO in 1971. These are two huge and important companies, right? One’s a high margin, high profit tech business. And one’s a retailer based in Arkansas who sells stuff cheap.

Intel market cap today: $200 billion

Walmart market cap today: $289 billion

  1. The retailing juggernaut was a better investment than the guys who invented the computer chip. That’s counter-intuitive, but that’s the way it worked out.

  2. Suppose you bought 100 shares at the Walmart IPO in 1970. $16.50 a share. That would be $1,650. Now suppose that was your only investment in the stock market. And you held it for 25 years. It would be worth $2,713,600 on January 31, 1994. Now suppose you had a bad experience in a Walmart. And you got mad and sold your stock and paid all that capital gains and you went on vacation to the Caribbean and you wanted to buy a Maserati and all that stuff. And you farted around for a couple of more years. And then you decided to pull yourself together and invest in the stock market again. And it’s 1997. And you had some success with retailers. So you decide to buy that new internet retailer, Amazon. Because people are saying Amazon is way better than Walmart. So you take what’s left of your $2.7 million and invest it in Amazon at the IPO. You’re buying 100,000 shares at $18 a share. That’s the only stock you like to buy, retailers, and you like to buy the best one. So now you’re an Amazon bull. And you have a 2-for-1 split, and a 3-for-1 split, and a 2-for-1 split. (Man, I miss splits!) Anyway, now you’re holding 1,200,000 shares of Amazon. And you’re a dummy, so you hold and hold and hold. Right now, your net worth is $2.2 billion dollars. You are very rich and it’s a couple of retailers that took you there.

Amazon started with books and now is the biggest retailer for just about everything. This explains the huge increase in market cap.

Yes. That’s exactly right. Amazon is a huge retailer. But they don’t sell houses, or cars. And those are huge markets. So what internet retailer is going to upend the car market, and the real estate market?

Amazon’s customers come back over and over again which gives Amazon hordes and hordes of loyal customers. Home purchases and car purchases are once in a blue moon purchases. This means that Caravana and Zillow’s customers will be essentially new with each transaction. They won’t really benefit from repeat purchasing.

That’s an excellent point. I would add that people who are shopping for a car or a house are not going to do any impulse buying. These are high ticket items. People are going to do some research before they buy. And it’s almost 100% certainty that people are going to do this research on-line.

I can’t say with absolute assurance that Zillow and Carvana will be that dominant internet retailer. But I do know there will be an internet retailer in these markets. That’s because internet retail has vast efficiencies vs. brick and mortar. It’s smarter, faster, easier, cheaper. You have way more options. It’s kind of a no-brainer to shop for your car, or your house, on the internet. So which company providing that service will dominate? I am with Highlander on this. “There can be only one.”

these companies won’t benefit from many of the things that adds value to Amazon: collecting lots of data on their customers

Sorry, this statement is completely wrong. Zillow has a huge amount of data on the housing market. Carvana is very much a tech operation. There’s a reason Amazon is not competing with them. (And it’s not because housing, or autos, is a small market opportunity!)

The car market is probably going to shrink in the next decade.

No

electric cars will expend the useful life of cars making their purchase less frequent

No

people are migrating from the suburbs to the cities making other modes of transportation (walking, biking, public transport) more utilized

No

ride sharing is increase which will require fewer cars

No

the young generations (millennials and GenZ) prefer not to own cars…

No!

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I don’t think I agree with this. Just one winner? That’s not how retail markets typically work.

There’s a great book on this subject, written 20 years ago, called The Gorilla Game. The authors suggest that when you are investing in an industry, and you don’t know who the “gorilla” is, you buy a basket of stocks. And then when the gorilla, the alpha, the top dog, is revealed, you sell all the beta monkeys and the chihuahuas and you invest in #1.

This book was talking about tech companies, not retailers. And yet I often see the same dynamics at work in retail. Walmart and Apple can be very similar in that regard. Both companies have a lot of power, and impose their power up and down the value chain.

Anyway, you’re right, of course. There are a huge number of retailers, and there always will be. Indeed, one of my major investments is in Shopify, which seeks to empower tiny companies who want to sell things on the internet. Are these retailers small? Yes. Are they helpless before Amazon? Probably. On the other hand, Shopify is empowered by these thousands of customers. And so Shopify itself is very powerful. One of my main reasons for investing in Shopify is that Amazon tried to compete with them and failed.

Basically I see Amazon as dominating internet retail, and Shopify dominating the anybody-who-is-not-Amazon internet retail.

I concede there are, and will continue to be, many retailers in autos and houses. Maybe even many mom-and-pop retailers. Nonetheless, I would suggest…

  1. Those mom and pop retailers will be bad investments

  2. Those big box retailers will also be bad investments

  3. Internet retail will upend cars and real estate, as it has upended so many other industries

  4. A winner, a top dog, a gorilla will emerge from this pack

  5. You want to identify and invest in that #1. Invest in the best and ignore the rest.

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What you are suggesting is that Amazon the retailer was not a monster stock, and AWS saved their ass. I can see why you think that way, but I fundamentally disagree.

That’s not what I was suggesting. I simply meant that a large part of AMZN’s value in its stock price is AWS. So when you said the 150+ bagger is a retail company growing that much, it’s untrue. The growth in value of the retail business was much lower.

My opinion is that you’ve made some logic errors the main one being that Zillow or Carvana will dominate as Amazon has and that those stocks will be as rewarding as Amazon was. I say very unlikely. But everyone draws their own conclusions and invests how they see fit. However, one thing that often happens is that people can become dug into their belief because they’ve argued a point or defended a company as a good investment that they believe will do well. It it sometimes different to then see new information or arguments objectively. “No. No. No. No!” Won’t make my points invalid to the future success of the businesses.

Chris

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I’m actually more interested in Redfin than Zillow. There is a storm brewing in the housing market, and if I had a crystal ball I would claim that we’ll see a big shift in the next 5 - 10 years as people wake up and start utilizing online based brokerages (obviously there is still an agent that meets with you in person) to save thousands on fees. I am relatively young but am currently on my third house. I remember when I was looking to sell my first house I immediately said to myself “this industry is a giant scam” (and I have a sister and cousin that have been very successful in the real estate industry mind you). I ended up selling that place on my own.

For our second home, I wanted to try out Redfin. They were so busy they didn’t have any agents available within a reasonable time frame, so they set us up with an affiliate. We didn’t pay the same % fee we would have directly through Redfin, but we did still save a little money. Their CEO was on NPR several months ago and I was impressed with how he presented the company.

Just to put things into perspective, since we like to discuss TAM a lot on here, the US Real estate sales and brokerage industry is a $150 billion industry and is growing at a decent rate.

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The real estate market is prime for disruption because I see no reason for a person to give up 6% of the value of their house to a real estate agent, when they can go online and sell it for 1.5%.

The days of real estate agents driving people around looking at houses with nothing but a description in the newspaper are over. Everything is done online now. So the agents are not “earning their keep” like they used to by either finding a house for a buyer or promoting for the seller. It’s all done on the MLS! You’ve got to figure 18,000 is a lot of money, and that’s 6% of a $300,000 house. That’s a lot to pay an agent when the buyer found your ad online without the help of your agent.

However the real estate agent market is very, very fragmented. There is no “gorilla” in that space. Why would there be online? We all know how Wal-Mart and Home Depot got the way they are, pricing power and being the de-facto standard for their category, discount shopping and home repair. Amazon from day one designed themselves to be the default for online shopping. Physical retailers have the advantage of proximity. A person is not going to drive across town to go to the equivalent of Amazon when they have an equivalent of Wayfair right next door. We’re just trained to go to Amazon. We have Prime, they have their credit card info, it’s one click shopping and they’re cheap. It would take a great deal of money to compete against Amazon at this point. Wal-Mart now has same day delivery in certain areas, but they have the stigma of being Wal-Mart, when Amazon even the name suggests you can find anything and everything there rather than cheap imported goods.

So what’s Zillow’s CAP? Are people going to go through Zillow to sell their house without even thinking of alternatives? There’s a big difference between buying/selling a $300k house compared to buying an X-box game on a site you know is going to be cheap and have your credit card info on file.
I do not see an easy path to garner mindshare of customers the same way Amazon did. What they supposedly have is intelligence on the real estate market. The Z-estimate. There has to be some competitive advantage there. From what I see I think the Z-estimate is garbage and a lot of others seem to agree that it’s not very accurate. So what edge do they have over Redfin, or countless others who want to buy/sell your house? I am constantly bombarded with robocallers trying to buy my house. There has to be multiple options online to sell your house quickly to a cash buyer. I’m not going to take the first offer because Zillow is convenient.

Their priority is actually having an edge over the countless other investors out there buying and selling a house who know their local market.

It’s interesting, but I agree with the other poster, Redfin is a viable alternative for this. Since they are not doing all that great right now, I didn’t dive too deep into it. I may if I were to sell a house… but I have no intention to take 80% of market value to some immediate cash buyer, leaving tons of money on the table.

CarMax, I just saw too many used car dealers go belly up over the years after their debt crushed them. So I didn’t look to hard into that one either.

But yes, internet changes retail in the fact that proximity doesn’t matter. It’s much easier to type a different URL into a browser than it is to drive across town. Amazon saw that which is why they did what they did.

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2) Those big box retailers will also be bad investments

Like Costco…and HD?

Cars.
Very different and hard to dominate compare to Amazon shipping a box from a warehouse.
First there are new, used and for sale by owner.
Cars have to be serviced…so some people will WANT to buy from a place that has service.
New cars (and some used ones) have to be prepped and cleaned before people are going to take delivery. Dealers already exist to do this…so they will resist all this…or be part of it and take a cut.
Some people like to take test drives…hard to do on the Internet.
Sure some people are just looking for a 5 year old Honda for KBB value and can search and slice and dice on the internet to find it. Others are buying their first car and most expensive thing they ever bought and want to “kick the tires” on a few cars, first.

There are already many online car buying and auction sites. I’ve sold two cars that way.

Mike

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if you can invest in much higher gross margin, stronger hold on the customer and recurring revenue businesses with very high headroom to grow - like MDB, AYX, TWLO, SHOP, SQ and such, why would you want to invest into lower margin, no hold in the customer, one time business type of markets like car and home shopping?

That’s a great question. I got a 4-part answer:

for the amazing revenue growth

Carvana

2015: $130,392,000

2016: $365,148,000

2017: $858,870,000

2018: $1,955,467,000

(Yes, the company almost skipped the $1 billion sales mark entirely, jumping from $859 million to almost $2 billion in revenues in a year. It will be interesting to see if they skip $2 billion in sales and $3 billion in sales and their next annual number is $4 billion in sales. I say yes!).

for the sheer size of the TAM

It’s not just that Carvana is growing revenue at such a quick rate. After all, you can grow geometrically off a tiny base. Start-ups and drug companies do that all the time. What’s impressive is this fast-paced growth is happening in the context of a massive operation. Most of our favorite SaaS stocks haven’t hit $1 billion in sales yet. Carvana not only hit it, they almost skipped over it. They will get to $10 billion in sales before Alteryx gets to $1 billion in sales. Bet you a beer. And I’ll make the same bet with Zillow. That’s a 2-beer virtual beer bet.

because of the negativity

I like negativity on my investments (sometimes). Not too much negativity, it harshes the vibe. I particularly hate negativity when those negative nellies have a point and they cause doubt in me and my investments and I sell out and then I miss out on all those fantastic gains. That is horrible negativity. But negativity when I am right and I know I’m right? That is awesome. Why is it awesome? Because it causes a massive short interest, all of which translates into future buyers if I am indeed right. Also all this negativity keeps the multiple low, really low, super-low. And there’s room for expansion as understanding shifts and more people come on board. Right now, Carvana has a P/S of 4.

because it’s been a fantastic investment so far

Here’s a 2-year chart, Carvana vs. Twilio

https://finance.yahoo.com/quote/TWLO/chart?p=TWLO#eyJpbnRlcn…

Carvana: 535% growth
Twilio: 461% growth

ZScaler hasn’t been around for two years, but they lose out, too…

Carvana: 224% growth
ZScaler: 138% growth

Look, we hold a lot of SaaS companies. 11% of our port is in Shopify. That’s almost twice as high as Carvana, which has 6%. I’m not saying that Carvana is a better investment than SHOP. I don’t actually have an opinion on it. We’ve held SHOP longer and just let that winner run. But what I am suggesting is that a low-margin, high revenue, high-growth business can be a fantastic investment.

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St Croix, my only suggestion is to watch the debt with Carvana because so many used car dealers have gone bust due to the debt load. Perhaps they are issuing enough equity too. But it’s expensive to build inventory of cars where margins are razor thin not to mention the infrastructure to sell it… but maybe their inventory turnover is sufficient.

Carvana does seem to have a new model in this new era of buying cars online without haggling with the dealer. And convenient when they are offering their best cost up front. And is inventory regional? It actually wouldn’t be easy to replicate what Carvana has done if they can successfully scale it.

You’re right. There is a world outside of SaaS and I have been going that direction too. I don’t see any reason to completely dissolve of SaaS, and besides, it seems each segment within SaaS. For example I don’t see why the tide ZScaler is in, which is cloud based security, should ride and fall along with Coupa which is procurement software. Totally unrelated industries though they may both follow the business cycle but one of the appeals in SaaS id they are supposed to be saving companies money, a necessity in all economies.

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I just checked, and with all those billions carvana is doing, their gross profit is actually comparable or lower than AYX depending on what quarter you measure. Which brings to the point sales is not everything. Sales does not pay the bills. Arrow Electronics is a $30 billion/year revenue company but is only worth 5billion. Their gross margin is only a little over 10%

So with Carvana they are selling an expensive car, tying up their money in an expensive car, to sell it at a razor thin margin. Not an ideal business model. Not only do you have razor thin margins, you have a ton of money tied up to sell that stuff at razor thin margins, that you have to pay for up front! At least with Costco or other retailers they may have net 30 or longer, they may sell the inventory before they even have to pay for it.

To pay up front and then have to sit on it and sell at razor thin profit is not an ideal business model. Which is why these auto dealers that grow so fast often go bankrupt.

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The real estate market is prime for disruption

yes

The days of real estate agents driving people around looking at houses with nothing but a description in the newspaper are over.

yes

However the real estate agent market is very, very fragmented. There is no “gorilla” in that space. Why would there be online?

I put this in my earlier post, but it’s worth repeating. This is the CEO of Keller Williams, a traditional realtor.

“I feel like I have no choice now,” Keller said. “I can’t allow Opendoor or Zillow to go out and be the only play in the iBuyer space and then begin to dictate terms and build brand around ‘they buy houses’.”

That’s a realtor who is now making offers on people’s houses. That’s a dramatic change in a business model. I can smell the flop sweat from here. “I feel like I have no choice now.” Why does he feel that way? Because consumers obviously are loving the iBuyer phenomenon. Keller even names names. He tells us the names of the companies who are scaring him, and their names are Opendoor and Zillow.

Opendoor is the rule-breaker in the iBuyer space. They invented it. They are the first mover. (They are also private and we can’t invest in them).

Last year, Zillow jumped in.

I was never interested in Zillow, because they never had the revenue growth. And they were unprofitable. And I didn’t much care for their business of “collecting eyeballs” and selling advertising space. It seemed to me a niche market. I just figured David Gardner was wrong about this one.

But here’s the thing I missed. Zillow now has a huge database of real estate information they have built up over their 14-year history. And now they are starting to monetize all of this knowledge. Their light business model is allowing them to shift quickly into adjacent businesses. All of a sudden, they’re providing mortgages (look out, LendingTree). But of course the big one is the iBuyer phenomenon.

Redfin is a viable alternative for this.

I disagree, but maybe you’re right. Definitely a gorilla game going on. Zillow, Opendoor, Offerpad, Redfin, Keller Williams. It’s worth googling iBuyer and reading up on it. I just discovered this site, pretty interesting…

https://www.mikedp.com/opendoor-ibuyer-business-model

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St Croix you bring sone interesting topics to the table but my concern is not all revenue is equal. For example carvana now has over $400 million in long term debt. Which is fine for now. They could have years of growth with equity issuance and debt. But once I hear articles about concerns over carvana’s debt, I’d probably sell. Consider that to Alteryx, which just recently had $12 million in debt. And both of these companies are generating about the same gross profit. One is in a scalable business one requires a huge amount of investment for the same gross profit growth.

Zillow is becoming more interesting. But I’d rather not buy a company that buys houses and resells them. Unless they are working with a bank that gives unlimited credit line and they’re actually good at what they do. TBD. Still requires debt though. Is Keller Williams good big to compete? Highly unlikely. Even open door. VC can only take you so far.

Historically these cash buyers will only buy at a huge discount but if Zillow is giving full price easily, and able to make a slim margin on it, that’s a huge game changer.

Again the revenue as a result is only pass through, but the gross profit could be interesting. Still something that could become a mess in a down real estate market.

Another reason assets light companies are ideal… but anything can happen within a few years.

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Zillow is becoming more interesting. But I’d rather not buy a company that buys houses and resells them.

I’m enjoying this site:

https://www.mikedp.com/opendoor-ibuyer-business-model

Click on that video on the left. Will iBuying Become Mainstream. Very interesting.

And this is worth a read: Zillow’s billion dollar seller lead opportunity

https://www.mikedp.com/articles/2018/11/12/zillows-billion-d…

If you’re thinking about Zillow doing iBuying and you’re not thinking about seller leads, you’re thinking about it the wrong way…

The value of the seller leads is almost 30 times the profit from flipping houses…

Zillow doesn’t need to actually buy and sell a lot of houses for this model to generate significant profits for the company in a national rollout.

The other interesting thing is that while the iBuyers have forced Keller Williams to start making offers for houses, the reverse is happening, too.

Opendoor’s pivot to agents

https://www.mikedp.com/articles/2018/11/4/opendoors-pivot-to…

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The important point here is that neither Zillow or Carvana have the same ability to scale as the SAAS companies that we are looking at here. A software company has a one-time big cost to create a sellable package, followed by much lower support costs. The scale leads to very high margins if the product sells well.

The margin on Zillow and Carvana isn’t going to increase substantially as they grow. They’ll continue to be heavily capital-intensive with inventory and carrying costs. And neither one has a unique product.

Having said that, both are probably good investments, just not in the same class as some of the others discussed here.

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A software company has a one-time big cost to create a sellable package, followed by much lower support costs.

Actually, companies often create core products and bring them to market, but then continue to invest heavily in development creating new companion products, adding functionality to existing products, and adjusting to the needs of individual customers. When I first opened doors as a ISV for an ERP software vendor the package I got was about 250 KLOC. 10 years later, my suite was 1.7 MLOC, including replacing the original 250 KLOC so that my product was independent of theirs.