These are hard times for the housing market. High home prices and high mortgage rates have sidelined both buyers and sellers. And yet Zillow's plan to transform into an all-inclusive housing services company seems to be weathering the storm like exterior paint.
Zillow, a housing technology company best known for its home listings, reports earnings after Wednesday's market close, and Wall Street has a sunny forecast.
Analysts expect Zillow's earnings to come in at 16 cents a share on $753.6 million in revenue for its quarter ended Sept. 30. That's up from four cents on $676 million from a year ago.
Browsing Zillow's website is free. The company makes money, in part, by charging the real estate agents who use it to connect with buyers. This revenue goes into its residential segment, which represented the bulk of its revenue -- $465 million, or more than 60% of its $772 million total -- in its second quarter.
But Zillow has switched to a revenue model it calls "Zillow preferred." Now a real estate agent pays the company after a home sale closes, not upfront to connect with buyers.
Zillow has said the new model generates more revenue per connection with a buyer than the old one, but the shift also contributed to the company's lower-than-expected third-quarter guidance.
Analysts will have their eyes on the residential segment to evaluate the company's transition to "Zillow preferred." They expect $435.4 million in residential revenue, about flat with the $435 million the year before, according to FactSet.
Wall Street predicts stronger growth in the company's smaller but faster-growing mortgage and rental segments. Expectations are for mortgage revenue to come in at $80.9 million, up from $53 million, and $222.8 million in rental, up from $174 million, according to FactSet.
High home prices and higher mortgage rates are headwinds for housing companies everywhere. That includes Zillow, RBC analyst Brad Erickson wrote in a Monday note.
Still, Erickson maintained his Outperform rating on the stock but lowered his price target to $45 from $55.
The stock is down roughly 55% this year on both the threat of technological disruption and slow home sales, putting it on track for its worst full year on record, based on available data back to July 31, 2015, according to Dow Jones Market Data.
"We believe a tougher housing backdrop, softer traffic and survey trends, and near-term headwinds from the accelerated Preferred transition warrant a more conservative outlook," a team of KeyBanc analysts, led by Sergio Segura, wrote in a Tuesday note.
The KeyBanc team also maintained its Overweight rating, but lowered its target price to $42 from $48.
"However, we view valuation as attractive, while Rentals and Mortgages continue to deliver robust growth despite a challenging market," they wrote.
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