Short Sellers Think Zillow Just Forfeited Its Most Lucrative Market

Influential short-selling firm Citron Research just published a report that says online real estate marketplace Zillow just forfeited what could have been its most lucrative market.

Citron, which has been critical of Zillow’s business model over the last couple years, says Zillow has made a huge blunder in a new agreement reached with Douglas Elliman Real Estate, a large residential broker in New York City. Under the agreement, all of Douglas Elliman’s listings will appear as “featured listings” on the Yahoo-Zillow real estate network.

But Citron believes Zillow is giving away a revenue opportunity — and that a centralizing market could force Zillow to cut many more deals like this one for listings feeds.

“Elliman shouldn’t be Zillow’s marketing partner- they should be Zillow’s customer… Not just any customer, one of its largest customers!” Citron says.

Citron acknowledges the terms of the deal were not disclosed. Zillow shares were largely flat Friday.

Zillow’s stock is a story unto itself. Over the last year, shares are up more than 120%, but the stock is one of the most shorted names in the market.

According to data from FinViz, the “short float,” or the per cent of shares outstanding that are being borrowed by investors who think the price will fall, is 33%.

For some perspective, Apple’s short float is 0.28%, Coca-Cola’s is 1.2%, and Chipotle’s is 3.82%.

Many would argue that part, if not most, of Zillow’s move higher could be considered a “short squeeze,” or buyers bidding up the stock because supply is limited.

When shorting a stock, an investor must borrow the shares with the intent of buying them back later at a lower price. If a large per cent of a company’s shares are held short, supply will be constrained, creating artificial demand that will push the price higher. Hence, the “squeeze.”

Carl Icahn bought a ton of Herbalife stock after Bill Ackman’s famous short presentation, and said Ackman could become the victim of “the mother of all short squeezes.”

In its report,Citron notes that since January 1, 2013, Zillow is up 400%. But over that same period, analysts’ earnings expectations for the company’s 2014 earnings have fallen more than 70%.

Citron also takes a swipe at Zillow CEO Spencer Rascoff, who they say has “mesmerized” Wall Street with “enthusiastic misdirection” away from a profitable business.

Rascoff appeared on CNBC earlier this week, and CNBC anchor Carl Quintanilla tweeted that when Rascoff was asked about sceptics who don’t trust the company’s high multiple and opaque metrics, he replied: “Haters gonna hate.”

It’s clear that Citron — and others on Finance Twitter — has a bone to pick with Zillow, but any stock that screams higher like Zillow is worth paying attention to.

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