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Zillow downgraded at Wedbush, price target cut by 43%

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Wedbush Securities senior equity analyst Ygal Arounian discusses his rating downgrade on shares of Zillow Group, which have been under pressure ever since the company announced it would stop buying houses for the rest of the year, and what the news could mean for Opendoor.

Video Transcript

[MUSIC PLAYING]

BRIAN SOZZI: It has been a brutal week for Zillow, and it's only Tuesday. The stock was hammered by almost 10% on Monday after the company said it would no longer be buying homes. And today, Wedbush is out with a downgrade on Zillow stock. Ygal Arounian is the analyst at Wedbush who lowered the boom on Zillow and joins us now for our call today. Ygal, always nice to see you. Why downgrade the stock today?

YGAL AROUNIAN: Yeah, thanks for having me. So, look, I think there was just a lot of things that were left unanswered in the press release and in the announcement about what all this means for Zillow and temporarily pausing purchasing of new homes. So they'll still have a number of homes that are under contract that they will see through. And then they will stop purchasing new homes and work through that inventory. And then the plan is to restart again, although they didn't give a specific timeline. They said they would likely set out for the rest of the year.

The reason we downgraded is because this has been a central part of the strategic shift for Zillow in being able to kind of capture the entire transaction, the entire residential real estate transaction, and shifting from just being a lead generation tool for real estate agents. And the iBuyer unit was really a central linchpin of that shift. And we think even pausing it for a couple of months is a really big indication. It impacts our estimates for next year in quite a material way. And it's just something we want to understand better and get more comfortable with before we feel like we could be more constructive with the stock.

BRIAN CHEUNG: Hey, it's Brian Cheung here. I want to ask about the competitor in this space, right, Opendoor Technology. What's interesting is that Zillow has been an established name for a while. They only got into Zillow Offers more recently. I believe it was 2018. But Opendoor Technology is really beating them on volume, even before Zillow had announced this temporary stoppage here. So I think they had, what, about 8,500 homes in the second quarter, Opendoor did, compared to Zillow's 3,800. What are you seeing in that space? Does Zillow's stoppage here allow Opendoor to really take more market share?

YGAL AROUNIAN: On its face, it probably does. Look, there's a lot of unanswered questions. You know, Zillow is pausing because they're at capacity constraints. So they're having a tough time getting contractors to renovate the homes and kind of work through the process of-- from the time when they buy the home till they could resell it. You know, Opendoor, who also didn't really comment in a big way yesterday, said that they're not slowing down, that they're kind of working at the normal capacity.

And, you know, Zillow coming out of the market for a couple of months is going to let Opendoor take a little bit more share in the market. And I think what we're seeing is that scale does matter, right? Like you note here, Opendoor is doing twice as much volume as Zillow is. And they're not slowing down. They're continuing to move forward. They might be seeing some of the same things that Zillow is, right? We are seeing labor shortages, and we are seeing the capacity constraints and supply constraints.

But Opendoor, at least from how they highlighted it yesterday, is going to continue to move forward. And I think that speaks a lot about their operational capabilities in the space and what they've developed over time, and being the original iBuyer, having done this business for three, four, or five years longer than Zillow has. So this should be a good opportunity for Opendoor. There are some questions that do remain unanswered that we need to hear more about at earnings. But for now, it does feel like a good opportunity for Opendoor.

JULIE HYMAN: Ygal, just quickly here, as somebody who covers the company and presumably is in communication with Zillow at certain points, like, what do we know about when they're going to start again and whether this is going to be a sustained hit potentially to their growth prospects?

YGAL AROUNIAN: Well, [INAUDIBLE] earnings. So the timing of all this is a little bit challenging. You know, typically, companies are in their quiet period right now in the weeks leading up to earnings. And there's only certain things that they're allowed to say from a regulatory standpoint, until they kind of come out and say it publicly.

So we'll have to wait for a few weeks until the earnings calls, which are coming up here in early November. And we'll get a lot of these questions answered then, especially around when they would intend to start and what it means for numbers and how they kind of build back up their scale in the coming year. But for the next couple of weeks, we're kind of left hanging.

BRIAN SOZZI: Wedbush analyst Ygal Arounian here for our call of the day. And that was a downgrade on Zillow. Thanks so much, Ygal.