Shares of real estate website Zillow (Z) took a massive hit Friday after a report attacked the company on a variety of levels, even challenging its business model.
The HW 30 Index — HousingWire’s exclusive index of housing-related stocks — showed Zillow's shares falling as much as 10% after Citron Research, a known short-seller, said the company was spending mega dollars on a marketing push to drive up sales.
In the second quarter, sales and marketing expenses were up modestly from year ago levels, Zillow said.
Sales and marketing costs alone rose $20.7 million in 2Q.
"We are in growth mode, with tremendous opportunity to grow our brand," explained Zillow spokesperson Katie Curnutte.
She added, "We’re thoughtfully and purposefully investing in advertising our brand."
Citron said the company has "been around for seven years, operating the same business model, and it has not made a meaningful profit over that timespan."
In the second quarter, Zillow reported record revenue of $46.9 million, representing growth of 69% year-over-year, Curnette countered when asked about the report.
Short sellers, which Citron is rumored to be, make a profit when a company's stock drops. They sell borrowed shares in the hopes of buying those shares back at a lower price. Ultimately, they plan to return those shares to the lender, pocketing the difference.
Citron asserted in its report that Zillow looks less promising now that its well-known ‘Zestimates’ tool is no longer unique to the market with other sites using a similar function.
But the company's leadership team feels confident in its web presence. During a second-quarter conference call, Zillow CEO Spencer Rascoff reported progress in consumer awareness. Since the start of the year, Google Trends has reported a 61% increase in searches for the word ‘Zillow’, while real estate searches only grew 16%, Zillow noted.
"As we’ve said for the past few quarters, investing in our brand today is part of our long-term strategy," Rascoff explained during the call.
He added, "We believe in the primacy of audience – that whichever model serves the consumer the best, establishes the largest household brand, and wins the largest sustained audience. Ultimately, we will take the lion’s share of the media revenue available in our category."
Overall, Zillow reported second-quarter results that were well ahead of market expectations.
Nonetheless, Zillow analysts say Citron’s reputation in short-selling created turmoil around the stock.
Consequently, Zillow's shares closed at $91.48, down nearly 7.50% Friday.