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Why Zillow Group Stock Dropped 17% in March

Joe Tenebruso, The Motley Fool

What happened

Shares of Zillow Group (NASDAQ: Z)(NASDAQ: ZG) declined approximately 17% last month, according to data provided by S&P Global Market Intelligence, following an analyst downgrade.

So what

Zillow's stock saw strong gains in February after the company issued aggressive long-term growth targets during its fourth-quarter report. Zillow said that, within three to five years, it expects to purchase 5,000 homes per month in its recently launched homes segment and generate annualized revenue of approximately $20 billion. The company also plans to originate more than 3,000 loans per month in its mortgages segment within this same time period. Investors cheered this ambitious growth plan, and the stock rose sharply.

But on March 15, analysts at Barclays downgraded Zillow's stock to underweight from equal weight. Barclays predicts that margins will decline in the company's home segment, due to slowing transaction times and mispriced inventory, as well as higher operating costs as Zillow attempts to scale the business in the coming quarters. Barclays also forecasts slowing growth in Zillow's premier agent business, due in part to recent changes in the company's advertising model. These concerns seem to have spooked investors, and the stock gave back most of February's gains by the end of March.

A person in a suit holding a big toy house in one hand and a small toy house in the other.

Analysts at Barclays think profits in Zillow's home business will be smaller than investors expect. Image source: Getty Images.

Now what

Zillow's shares have already bounced back 7% so far in April. The Federal Reserve recently announced that it was backing away from its plan to raise rates later this year. Investors now appear to be pricing in the potential for lower mortgage rates to spur home sales and refinancing activity. Recently released data shows that new home sales are at an 11-month high, and refinance applications jumped 39% this past week. These stronger housing market trends bode well for Zillow's stock going forward.

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool recommends Barclays. The Motley Fool has a disclosure policy.