The Ratings Game: Zillow’s vision could take ‘a step back’ as company pauses iBuying, analyst cautions

Zillow Group Inc. risks losing share to rivals as the online real-estate company pauses its iBuying program, an analyst cautions.

While Zillow


is perhaps best known for its website that lets people view estimated home values, the company has also been participating 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 company now plans to pause new purchases within that program through the end of year, according to a Bloomberg News story that cites comments from Zillow. The company is feeling the effects of a competitive real-estate market as well as labor shortages that could impede the company’s ability to renovate the homes it buys.

Amid these challenges, Wedbush analyst Ygal Arounian is worried about Zillow’s move given concerns that rival Opendoor will be able to build greater scale on a relative basis now that Zillow is taking a break. He downgraded Zillow shares to neutral from outperform in a Tuesday note to clients, while reducing his price target to $86 from $153.

“[W]hat is more clear now than last week is that scale does matter 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. Zillow’s rivals “are not hitting pause,” according to Arounian.

See also: Construction on new homes slows as supply-chain woes hit the housing market

He also worries about Zillow’s longer-term objectives: “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.”

Arounian sees “too many question marks” for Zillow after this latest decision. He wonders why the company didn’t take a less drastic move, such as slowing down its purchasing or limiting activity to regions that were seeing less disruption.

Jefferies analyst Brent Thill saw two possible outcomes for Zillow following the iBuying pause. Either the company “already has enough inventory to hit consensus estimates in the 2H21” or its labor shortages “negatively impacted the near-term trajectory, resulting in downside to consensus estimates in the 2H21,” he wrote.

Thill wrote that Zillow might 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 the faith, including RBC Capital Markets’ Brad Erickson. While “[a]cknowledging ZG’s iBuying pause will clearly be the controversy into Q3 EPS,” he wrote that he encourages investors “to not lose sight of ZG’s medium/long-term strategy of capturing increased value in the $100B+ broker commission pool.”

Erickson has an outperform rating an $145 price target on Zillow shares.

Zillow shares fell 9.5% in Monday’s session after Bloomberg first reported of the company’s plans to pause iBuying activity, then bounced 0.9% in Tuesday trading. The shares have declined 17.8% over the past three months as the S&P 500 index

has increased 6.1%.

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