Bank Of America: Zillow Falls On 'Concerns About Homes, Entry Into Originations'

Zillow Group Inc ZGZ posted relatively in-line second-quarter revenue that represents a 22-percent year-over-year increase. The stock nevertheless plunged 17 percent.

What Happened

By many accounts, Zillow’s quarterly report demonstrated encouraging growth. Unique traffic to its apps and websites struck an all-time monthly high, with visits increasing 14 percent year-over-year. The real estate platform's net loss shrunk significantly over the same period, and Zillow’s 13-cent bottom line beat a 9-cent consensus estimate.

At the same time, management cut 2018 guidance well below analysts’ estimates.

The firm separately announced an agreement to acquire Mortgage Lenders of America, which diversifies its offering with home loan origination.

Why It’s Important

The foray into mortgage origination builds on Zillow’s feature that provides quotes from third-party lenders.

“Owning a mortgage lender will allow Zillow Group to develop new tools and partnership opportunities, including for real estate brokers with existing in-house mortgage operations or mortgage affiliates,” the company said. 

The market seemed less than receptive to the plan. Bank of America Merrill Lynch attributed the stock decline to Zillow’s newer business lines and to “greater concerns about Homes, entry into originations and less optimism on IMT upside.”

Bank of America downgraded the firm from Buy to Neutral on delayed Homes ramping, missed rentals revenue and MLOA’s risk to earnings before interest, tax, depreciation and amortization. The sell-side firm lowered its price target for Zillow from $70 to $60.

“We do not see any fundamental problems for the business post-2Q earnings, but it appears that initiatives in Premier Agent, rentals and Homes will take longer to bear fruit, with considerable near-term headwinds to topline and margins,” the downgrade note said. 

What’s Next

The MLOA transaction is expected to close in the fourth quarter. Class A Zillow shares were falling nearly 17 percent to $48.98 at the time of publication Tuesday. 

Related Links:

Morgan Stanley: Zillow Offers Attractive Entry Point For A High-Quality Asset

Analyst: Redfin An 'Attractive' Play In Disruption Of The $75B Real Estate Brokerage Industry

Photo courtesy of Zillow.