Wall Street was more cautious on real estate technology stocks on Monday, ahead of earnings reports later this week, as some analysts slashed price targets to reflect their concerns about housing affordability with interest rates rising.
Although per-share and revenue estimates for the three companies have remained relatively steady over the past few months, the stocks have been diving amid growing investor concerns over how the housing market will adjust to a rising rate environment.
BofA Securities analyst Curtis Nagle chopped his stock price target for Redfin in half, to $10 from $20, while cutting his targets for Opendoor shares to $6.50 from $8.00 and for Zillow to $38 from $47. Those new targets are all below where the stocks are currently trading.
Nagle said that web traffic trends across advertising and lead generation, brokerage and iBuying was “tepid” in April, leaving all three companies’ stocks as “controversial” going into their earnings reports.
“We see the weak web traffic as an indicator that home purchasing demand is slowing, likely due to low affordability, much higher mortgages and big volumes gains in 2020/21,” Nagle wrote in a note to clients.
And despite how much the stocks have already underperformed this year, he’s still bearish as risks to growth and margins remain.
“We continue to see worsening home affordability (due to higher prices and rates) as a big headwind for volume and transaction growth through 2022,” Nagle wrote.
Shares of Redfin plunged 70.1% year to date, Opendoor plummeted 50.3% and Zillow tumbled 36.8% through afternoon trading on Monday, while the Vanguard Real Estate exchange-traded fund
dropped 13.8% and the S&P 500 index
Meanwhile, Wedbush’s Ygal Arounian said it’s difficult to see “what gets this group going” in the current rising rate environment, so he slashed this targets on the shares of Redfin to $13 from $23, of Opendoor to $11 from $20 and of Zillow to $43 from $60.
“Investor sentiment is materially bearish, and we are likely going to see downward estimate revisions at least this quarter and possibly in the coming quarters as well,” Arounian wrote in a research note.
Although the outlook for the stocks are “certainly not rosy” into the earnings reports, especially given housing affordability challenges, he’s not actually bearish on the stocks because demand for housing still exceeds supply and as he believes the stocks are already pricing in the worst-case scenarios for the housing sector.
Nagle rates Redfin and Opendoor at outperform and Zillow at neutral.
“We are tactically more cautious into the [earnings] prints and don’t expect investor sentiment to improve materially in the near term, but with valuations nearing COVID lows, also believe shares have overshot the risk factors in the housing market,” Nagle wrote in a research note.
What analysts are expecting
Here are the FactSet consensus estimates for certain metrics ahead of the companies’ earnings reports:
Per-share loss of $1.09, versus a loss of 37 cents a year ago.
Revenue that rises to $551.4 million from $268.3 million, which compares with company guidance provided in February of between $535 million and $560 million.
Real estate service segment revenue of $175.7 million, compared with guidance of between $165 million and $171 million.
Properties segment revenue of $330.7 million, which is within guidance of between $330 million and $350 million.
Rentals revenue of $37.1 million, compared with guidance of between $37 million and $38 million.
Redfin has beaten per-share expectations in six of the past seven quarterly reports and has beat and revenue expectations the past seven quarters, but the stock has fallen on the day after the past seven reports, by an average of 10.8%, according to FactSet data.
Per-share loss of 17 cents, compared with a loss of 48 cents a year ago.
Revenue of $4.29 billion, which is within guidance provided by the company in February of $4.1 billion and $4.3 billion. The company reported revenue of $747 million a year ago.
In the five quarterly reports since the company went public in June 2020, the Opendoor has beat per-share expectations three times and topped revenue expectations five times. The stock has gained the day after earnings twice, by an average of 19.8%, and lost three times by an average of 15.3%.
Earnings per share of 24 cents, down from 44 cents a year ago.
Revenue of $3.36 billion, up from $1.22 billion a year ago.
Internet, media and technology (IMT) segment revenue of $490.5 million.
Premier Agent revenue of $365.6 million.
Mortgages segment revenue of $47.4 million.
Zillow has beat per-share and revenue estimates in seven of the past eight quarters, while the stock has gained the day after earnings five times (average gain of 13.2%) and fallen three times (average loss of 13.1%).