An analyst is warning that Zillow Group Inc. risks losing share to rivals as the online real-estate company paused its iBuying program.
While Zillow ZG, Z is perhaps the best known for its website that lets people view estimated home values, the company has also been contributing in the iBuying trend. This means that Zillow buys homes directly from owners, using data to determine the pricing, and then looks to resell them.
The firm has agreed to pause new purchases from the current program until the end of this year, according to a Bloomberg News article that supports comments from Zillow. The company is experiencing the effects of a competitive real-estate market as well as labor shortages that could hinder the company s ability to renovate the homes it buys.
Amid these challenges, Wedbush analyst Ygal Arounian is concerned about Zillow s move given concerns that rival Opendoor will be able to build larger scale on a relative basis now that Zillow is giving a break He reduces Zillow shares to outperform in a Tuesday note to clients, while also neutralizing his price target to $86 from $153.
W hat is more clear than last week in that scale matters and that there can be differences in operational know-how that leads to variations of effectiveness, in what is proving to be a difficult business model to operate at scale, he wrote. According to Arounian s rivals Zillow, they are not hitting pause.
See also: Construction on new homes slows as supply chain woes hit the housing market.
He also worries about Zillow s longer-term goals: What compound 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, at FTD, believe it s hard to argue that the vision doesn t take a step back. Arounian sees too many questions for Zillow after this latest decision. He wonders why the company didn t take a less drastic move, such as slowing its purchasing or limiting activity to regions where the company saw less disruption.
Jefferies analyst Brent Thill saw two possible outcomes for Zillow amid the iBuying pause. Either the company has enough inventory to hit consensus estimates in the 2H 21, or its labor shortages negatively affected the near-term trajectory, resulting in downside to consensus estimates in the 2 H 21, wrote he.
Thill wrote that Zillow will see the most pronounced impact next year given the time it could take for the company to grow inventory once again.
Our long-term outlook for iBuying is unchanged, but we think Zillow s pause shows labor is a key barrier to scaling the business he wrote, noting that while Zillow can use technology and automation for some aspects of the iBuying process, it still relies on humans for aspects like repairs and inspections. Thill has a buy rating and $196 price target on Zillow s stock.
Other analysts were more willing to keep faith, including RBC Capital Markets Brad Erickson. While a cknowledging ZG s iBuying pause will clearly be the controversy into Q 3 EPS, he wrote that he encourages investors to not lose sight of ZG's medium long-term strategy of capturing increased value in the $100 B broker commission pool. Erickson is an outperform rating and has a target price of $145 on Zillow shares.
The shares of Zillow fell 9.5% in the month of Monday, after Bloomberg reported about the company s plans to halt iBuying activity and then fell 0.9% in trading on Tuesday. Shares have increased over the past three months. The S&P 500 Index has declined 17.8% - 6.1%.