I'm a fan of the new iBuying trend in real estate. There are two major players, Zillow, (ZG) and Opendoor, (OPEN). It's an easy business as long as real estate prices are moving up but neither company has worked through a down real estate market until now. During the bubble this summer ZG was apparently playing catch-up with OPEN in the iBuying segment of their business and now holds properties that are marginally under water. Their current issues are not dissimilar to the problems OPEN had earlier this year when they bought more homes than they could renovate and sell. They also had to stop buying homes to unload inventory and free up cash. Luckily OPEN made this mistake in a rising market and the delay was not harmful.
Q3 revenue for each player is about equal at $2B. ZG is the more mature business and has turned a profit for the last four quarters, OPEN has not. ZG market cap is about double OPEN. I own shares of OPEN as it's a pure iBuying play. From Barron's:
Zillow Stock Falls Further After Report It Plans to Sell 7,000 Homes for $2.8 Billion
One day before Zillow Group is set to release its earnings, shares of the real estate firm tumbled amid worries about its homebuying program, Zillow Offers.
Zillow Offers aims to sell 7,000 homes for $2.8 billion, Bloomberg reported Monday, citing people familiar with the matter.
Should Zillow (ticker: Z) sell those homes for that price, the price per house would be about $400,000. Last quarter, Zillow sold 2,086 homes for an average price of $370,100, according to a Securities and Exchange Commission filing. If Bloomberg’s report is correct, Zillow has nearly doubled its home inventory as of last quarter, according to figures in its second-quarter shareholder letter.
Zillow declined to comment to Barron’s regarding Bloomberg’s report.
Shares of Zillow, which had fallen nearly 6% before the report was published, fell further after Bloomberg’s article surfaced. The stock recovered from its intraday low to close down 6.3% to $97.42.
The Bloomberg report follows mid-October news that the company would pause home purchases through its Zillow Offers program, also known as its iBuying program, through 2021. The company at the time cited operational constraints and its renovation backlog.
In the weeks that followed, several analysts covering the company’s shares lowered their price targets on the stock. The average target price for Zillow’s Class C stock is currently $142.37, down from $160.32 at the end of September, according to FactSet.
Analysts have continued to weigh in negatively on the stock. In a note published Sunday, KeyBanc Capital Markets analysts expressed concerns beyond operational constraints. The team said they conducted an analysis of 650 homes and found that 66% were listed below Zillow’s purchase price. “Zillow may have leaned into home acquisition at the wrong time, and we believe earnings may be at risk due to its current homes inventory,” wrote analysts Edward Yruma, Abigail Zvejnieks, Samantha Hanley, and Kenny Temsupasiri.
Zillow didn’t immediately respond to a request for comment on the report.
Other analysts have raised concerns about Zillow’s market share. In a note published early last week, Wedbush analysts downgraded the company’s Class A shares (ZG) to Neutral from Outperform, noting that the company could surrender iBuying market share to competitors like Opendoor Technologies (ticker: OPEN), another company that buys and sells homes.
Investors bid up shares of the Zillow’s iBuying competitor on Monday. Opendoor stock closed 4.4% higher.
These reports will be another reason to watch Zillow’s third-quarter earnings report Tuesday after the market close.
