Wedbush downgraded residential real estate company Zillow’s stock and slashed the US real estate firm’s share price estimate by 43% on Tuesday.
The investment advisory firm lowered Zillow’s rating to neutral from outperform and cut the share price estimate to $86 (£62.36) from $153 (£110.95) after Zillow announced on Monday 19 October that it is pausing its iBuyer home-purchasing programme through to the end of 2021.
Ygal Arounian, a Wedbush senior equities analyst, said the pause left too many unanswered questions. He said the downgrade resulted because the company shifted from its “lynchpin” strategy of purchasing new homes and assisting clients in all phases of a residential real estate transaction.
Pause spells material impact
“We think even pausing (the iBuyer home-purchasing programme) for a couple months is a really big indication,” said Arounian. “It impacts our estimates for next year in quite a material way, and it’s something we want to understand better and get more comfortable with before we feel like we could be comfortable with the stock.”
An iBuyer programme uses machine learning to make an instant purchase offer on a home. Seattle, Washington-based Zillow said its move could impact prospective sellers who have yet to sign contracts.
The firm is grappling with a renovations and deal-closings backlog. Zillow will not sign any new, additional contracts to purchase any homes through the end of 2021 as it deals with a renovation and deal-closings backlog, the company said in a news release.
Zillow continues to sell homes
“Zillow will continue to market and sell homes through Zillow Offers during this period,” the company added.
The Zillow Offers service enables homeowners to sell their properties without having to co-ordinate repairs or host open houses as the company performs those tasks instead. Zillow said it is connecting sellers with an agent partner.
Zillow COO Jeremy Wackman said the company is dealing with a labour-and-supply-constrained economy within the real estate market, especially in the construction, renovation and deal-closing spaces.
“Pausing new contracts will enable us to focus on sellers already under contract with us and our current home inventory,” said Wackman.
Arounian expressed sympathy for Zillow, noting the company is limited in what it can say about future operations, due to regulatory rules, as its quarterly earnings report date approaches. But he issued a scathing client note on Zillow’s prospects, contending that the pause will allow rivals Opendoor and Offerpad to gain market inroads.
“By sitting out for whatever period (even though it is still making purchases on homes under contract in the thousands, presumably in the thousands), it is going to cede material market share to its peers, and allow Opendoor to build greater relative scale,” Arounian wrote in the report, which he provided to Capital.com but is otherwise available only to Wedbush clients.
Arounian said Zillow will give back much of the market that it fought for in the past four years. He forecasted that Opendoor will control about 53% of the market by 2023, while Offerpad will rank second with 28% and Zillow will drop 10 points to 17%. Before its current troubles, Zillow had been expected to overtake Offerpad, Arounian noted.
“We don't know yet if Opendoor and Offerpad are going to see higher renovation costs (or) to what extent and what the impact will be,” wrote Arounian. “But we do know they are not hitting pause.”
In contrast, Arounian delivered a relatively positive separate note to clients on Opendoor, which he also provided to Capital.com.
“Opendoor is simply a better iBuyer operator,” Arounian wrote.
But he noted that Opendoor’s gross margins could suffer if the company is paying more for contractors and renovation materials to secure them faster.
Zillow did not respond to a request for comments by Capital.com’s deadline.