Zillow downgraded by Bank of America on ‘greater risk’ to profits from adding mortgage lending

Key Points
  • Bank of America Merrill Lynch lowers its rating to neutral from buy for Zillow shares, citing increasing concerns over its business model shift to home selling and mortgage lending.
  • The firm's analyst, Nat Schindler, said the company's acquisition of Mortgage Lenders of America could hurt its fiscal 2019 profits.
The Zillow Inc. app.
Andrew Harrer | Bloomberg | Getty Images

Zillow's big move into mortgage lending may hurt its profitability next year, according to Bank of America Merrill Lynch.

The firm lowered its rating on the online real estate company's shares to neutral from buy, citing increasing concerns over its business model shift.

Zillow shares plunged 16 percent Tuesday, a day after it reported second-quarter revenue of $325 million, just shy of consensus estimates of $326 million, according to Thomson Reuters. The company announced plans to acquire Mortgage Lenders of America, a national mortgage lender.

The integration of that business poses a risk for 2019 results at a time when Zillow is already under pressure, analyst Nat Schindler said in a note to clients. "The quarter revealed challenges for multiple business segments that limit our optimism on FY19 upside," he said.

Schindler lowered his price target to $60 from $70 for Zillow shares, representing 2 percent upside to Monday's close.

In April, Zillow announced a significant change to its business model, starting a capital-intensive business of buying and selling homes directly with consumers, expanding its offerings beyond its online real estate services. The Mortgage Lenders of America acquisition is intended to supplement that effort, the company said.

Schindler said in his note that Zillow is taking longer to get the homes business off the ground, with its revenue outlook for this fiscal year around $30 million, down from previously expected $190 million. "We think investors will wait for more clarity on the Homes and Mortgage businesses, now that management has sharply altered their trajectories."

Zillow did not immediately respond to a request for comment.

The company's stock is up 45 percent this year through Monday versus the S&P 500's 7 percent gain.

— CNBC's Sara Salinas contributed to this report.