The Ratings Game: Zillow’s average stock price targets get slashed, but still imply more than 50% upside
A lot of Wall Street analysts covering Zillow Group Inc. had some negative things to say about the real estate services company on Wednesday, following its plan to get out of the home-flipping business, but that doesn’t mean they recommend investors sell the stock.
Of the 24 analysts surveyed by FactSet who cover Zillow, no less than 14 lowered their price targets. That lowered the average price target on Wall Street for the Class A shares to $106.05 from $144.50 at the end of October, and for the more-active Class C shares to $101.67 from $142.37.
But while 13, or 54%, of the analysts surveyed don’t recommend buying the stock, as they now rate it the equivalent of a hold, nine still say the stock is a buy and only two say it’s a sell.
The Class C shares
plunged 24.6% in afternoon trading and the Class A shares
plummeted 23.4%, both toward 15-month lows, after Zillow reported late Tuesday a surprise third-quarter loss and revenue miss, said it would cut about 25% of its workforce and announced plans to “wind down” its iBuying service after disclosing losses of more than $550 million on homes purchased.
Don’t miss: ‘It’s really a toy’: Zillow closes home-flipping business. What does that say about the reliability of its Zestimate home-valuation tool?
The Class C shares are suffering the biggest one-day drop since November 2018. They have now slid 36.6% the past three days and the A shares have shed 38.1% over the same time.
If there’s a silver lining, it’s that the new average analyst target for the C shares is about 55% above current levels, and the average A price target implies 62% upside.
“IBuying is dead, long live Zillow,” wrote RBC Capital analyst Brad Erickson, who cut this price target to $100 from $145, but kept his outperform rating.
He said that while the unexpected iBuying exit “throws cold water on our down-funnel bull thesis,” and muddles the path to expanding monetization opportunities, “Zillow’s core Premier Agent business is still a very good asset-light business, out-growing the market with 50%+ [long-term] margins that is not fully appreciated,” with the stock at current levels.
Jefferies’ Brent Thill is also still bullish, writing: “Big swing and miss, but dugout still has some stars.”
Thill lowered his price target to $115 from $150, but kept the rating at buy.
“We’re sticking with our buy rating given the stock was already pricing in limited value for iBuying and because better-than-expected results/guidance for IMT [internet, media and technology] suggests there is a long runway for attractive growth as [Zillow] improves monetization by leveraging its leading traffic and relationships with top agents,” Thill wrote in a note to clients.
Of course, analyst commentary wasn’t all rosy. BofA Securities’ Curtis Nagle dropped his price target to a Street low $50 from $85, and reiterated his underperform rating, saying the company “finally bids adieu to a very expensive ‘experiment.’”
He said that while the IMT business delivered a decent quarter with growth slightly above the market, he is cautious on the business given slowing housing demand and decelerating growth.
Also read: Zillow is offloading 7,000 homes — raising ‘red flags’ about the real-estate market.
“We have been cautious on the iBuyer business and while [Zillow] may be an extreme example, we see market risks including declines in home turnover, particularly in mid-to-lower end of the market and rising unaffordability,” Nagle wrote.
Zillow’s Class C shares have slumped 49.4% year to date and the Class A shares have declined 51.9%, while the S&P 500 index
has gained 23.5%.
Here are some other lines analysts wrote in research notes about Zillow leaving the home-flipping business:
“A shocking end to an ambitious project,” wrote Wedbush analyst Ygal Arounian. He cut his price target to $67 from $86 but kept his rating at neutral, since the stock has already fallen “materially.” The company Zillow 360 offering has a suite of products that can “continue to drive the flywheel,” if not do a better job than iBuying, but they will need time to develop.
“Flipping is a flop,” wrote KeyBanc’s Edward Yruma. He said the iBuying problems were “even more severe than our pessimistic expectations,” and he remained concerned that the core IMT business will slow with overall real estate trends. Yruma kept the sector weight rating he’s had on the stock since February 2020, and didn’t cut his price target because he didn’t have one.
“From flipping to flopping,” wrote Scott Devitt at Stifel Nicolaus. He lowered his price target to $85 from $105, but kept the hold rating he’s had on Zillow for at least the past 3 1/2 years. He said that while Zillow faces a number of potential macroeconomic headwinds, including a slowing housing market and rising interest rates, the company remains a “category leader” in online real estate and has developed “innovative digital tools” for real estate professionals.
“Bye bye (i)Buy,” wrote Benchmark’s Daniel Kurnos. “In the famous words of Ron Burgundy, ‘Boy, that escalated quickly.’” He slashed his price target to $105 from $200, but kept his rating at buy. “We have consistently stated we believe the IMT business is worth over $100 per share, and for that reason alone we are not downgrading the stock, suspecting that multiple expansion from here would not be unreasonable under normal circumstances, which these are anything but,” Kurnos wrote.