Online real-estate company’s stock was downgraded because prices already reflect a housing recovery, analyst says
Shares of Zillow Group Inc. were knocked lower Wednesday following a Wall Street analyst’s call to stop buying, saying prices already reflect a recovery in the housing market.
BofA Securities analyst Curtis Nagle said uncertainties over lawsuits on the commissions paid out to real-estate agents could also pressure the online real-estate-services company’s stock in the coming months.
The more active Class C shares Z, -1.52% ZG, -1.97% dropped 1.7% in morning trading after Nagle downgraded them to neutral from buy.
The stock was headed for its sixth loss out of 2024’s seven trading sessions, for a year-to-date decline of 5.8%. That follows a 41.3% surge in December, which was the best monthly performance for either the Class C or Class A shares since the company went public in July 2011. The S&P 500 SPX gained 4.4% in December.
With that December rally, Nagle said the stock has already priced in a “steady recovery in housing in 2024.”
He worries, however, that even if interest rates decline as expected, continued “near record-low home affordability” could continue to hamper the housing market.
In addition, a recent court ruling that the National Association of Realtors and two real-estate brokerages conspired to inflate commissions could hurt Zillow’s buy-side-agent lead-generation business, which represents nearly half of the company’s revenue.
“We do not expect a banning of commission sharing from the suits (which could be a major headwind to [Zillow revenue] and burden to homebuyers) and expect [Zillow] to successfully adapt to changes on revenue diversification,” Nagle wrote in a note to clients. “However, we expect uncertainty to be an overhang on valuation until more clarity is brought on the issue, starting with a final verdict for Sitzer in April.” An initial verdict in the case known as Sitzer/Burnett was reached in October.
The risks from the lawsuits for investors is that they could lead to a reduction in the number of real-estate agents because of lower earnings potential, lower commission amounts due to increased transparency on fees, and uncertainty over who will be responsible for the buy-side commission.
With Nagle’s downgrade, 13 of the 28 analysts surveyed by FactSet who cover Zillow are now neutral on the stock, while 14 are bullish and one is bearish.
Meanwhile, Nagle’s $60 stock-price target is well above the average target of $52.50, which implies nearly 4% downside from current levels.