Analyst says Zillow’s pause on homebuying ‘leaves many unanswered questions,’ lowers stock outlook

Analysts with Wedbush slashed their 12-month price target for Zillow Group by more than 40% following the company’s decision to temporarily pause purchasing new contracts to buy homes via its home-buying and selling service Zillow Offers for the rest of this year.

Ygal Arounian and Chad Larkin of Wedbush said the move “leaves many unanswered questions in the near term” and as a result, Zillow will “cede material market share to its peers.”

Zillow Offers is the company’s “iBuyer” service that aims to digitize the homebuying experience from start to finish and accelerate the entire process. It competes with other iBuyer services from Opendoor, OfferPad, and Redfin, among others.

Zillow said it is pausing new home purchases due to a “backlog in renovations and operational capacity constraints.”

Other iBuyer companies haven’t announced any similar slowdown.

“We don’t know yet if Opendoor and Offerpad are going to see higher renovation costs, to what extent, and what the impact will be. But we do know they are not hitting pause,” Wedbush wrote in a report.

“What compounds these concerns in our view is that 2022 was supposed to be the year where Zillow’s move to capture the transaction was going to take greater shape, with greater investments, and the bundled offering driving growth from iBuyer traffic to ‘partner leads’ and mortgage growth. We think it’s hard to argue that that vision doesn’t take a step back.”

Brad Erickson, an analyst with RBC Insight, was more optimistic. His price target is $145, nearly double Zillow’s current stock price of $87.

In RBC’s report issued Monday evening, Erickson said Zillow’s iBuying strategy is less about meaningful margins and more about “its real purpose of generating home-seller signal” and “capturing a larger chunk of the broker commission profit pool.”

Zillow CEO Rich Barton said earlier this year that Zillow Offers is part of the company’s larger strategy to target users.

“Millions come to Zillow to surf and dream, and when they are ready to transact, they can get a mortgage from Zillow Home Loans, connect to a Zillow Premier Agent, and may even find an initial offer from Zillow Offers to buy their home for their Zestimate,” he said in a statement following Zillow’s first quarter earnings report.

Zillow purchased 3,805 homes in the second quarter of this year, more than double what it purchased in the first quarter. It ended Q2 with 3,142 homes in inventory.

For comparison, Opendoor bought around 8,500 homes in the second quarter.

Zillow Offers is live in 25 markets; Opendoor is active in 44.

Shares of Opendoor were up 3% on Monday following the Zillow news.

Zillow’s home-buying segment brought in $772 million in Q2 revenue, up 70% year-over-year, and accounted for more than half of Zillow’s total revenue. The homes segment posted an adjusted loss of $29 million, down from $60 million.

After its stock skyrocketed during the pandemic-driven housing boom, Zillow shares have fallen more than 30% this year. The housing market has shown signs of cooling in recent months.

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