Analyst downgrade and rationale
Bernstein moved Zillow Group to a Market-Perform rating from Outperform after the company released second-quarter results and provided guidance that the firm found disappointing. In a note to investors, analyst Nikhil Devnani said the firm was "throwing in the towel" on its Zillow call, citing a loss of conviction in the fundamental case that originally supported a more bullish stance.
Forecast and price-target cuts
Devnani lowered Bernstein’s EBITDA run-rate estimate for Zillow by 10% and reduced the firm’s price target to $38, down from $50. He acknowledged the team had "got this one painfully wrong - most certainly with our timing on the upgrade," but emphasized that the more significant concern is the erosion of confidence in the thesis following the quarter.
Where the thesis faltered
The bullish scenario at Bernstein relied on two main pillars: expanding share gains driven by Zillow’s transition to a Preferred revenue model and the realization of meaningful operating leverage. Those elements now appear under pressure after the guidance accompanying the second-quarter report.
Zillow guided Residential revenue to no growth year over year in the third quarter, and Bernstein observed that share gains outside of Mortgage are appearing to compress. The firm attributed those developments to several factors that are changing the near-term revenue profile: revenue shifting toward Mortgage rather than Residential, timing lags in recognizing Mortgage revenue, and rising seasonality.
Outlook and debate points for investors
Bernstein said it expects these headwinds to ease by the second half of 2027 but warned they "could keep a lid on Residential revenue growth over the course of 2027," a dynamic it expects will spur debate among investors over monetization risk. Devnani also raised the question of "the right multiple to put on the stock if revenue gets recognized through Mortgage origination vs. advertising," highlighting a valuation ambiguity tied to the evolving revenue mix.
Margins and underwriting concerns
While margin expansion is projected to improve in 2027, Bernstein expressed caution about continuing to assume underwriting performance that would exceed consensus figures while the company’s core profit engine faces subdued growth. That combination, the analyst said, makes achieving prior upside scenarios more challenging.
Market reaction
The street reaction included a notable move in the stock, which was shown at $31.47, down $5.42 or approximately 14.69% in the real-time snapshot included with the note.
Summary
Bernstein downgraded Zillow to Market-Perform and cut its price target after disappointing guidance for Residential revenue and signs that share gains outside Mortgage are compressing. The firm lowered its EBITDA run-rate estimate by 10% and signaled uncertainty about valuation as revenue shifts toward Mortgage recognition.
- Key points
- Bernstein downgraded Zillow from Outperform to Market-Perform and trimmed its price target to $38 from $50.
- EBITDA run-rate estimate was cut by 10% as the firm lost conviction in growth driven by the shift to a Preferred model and operating leverage.
- Disappointing guidance - Residential is guided to no year-over-year growth in Q3 - and revenue mix shifting toward Mortgage are central concerns for investors and analysts, affecting real estate and ad-driven tech market assessments.
- Risks and uncertainties
- Monetization risk - investors may debate how to value revenue recognized through Mortgage origination versus advertising, affecting valuation multiples for the stock and peers in online real estate and digital advertising.
- Timing and seasonality - a timing lag on Mortgage revenue recognition and increasing seasonality could keep Residential revenue growth muted through 2027.
- Underwriting and margin assumptions - projecting underwriting results above consensus while core Residential growth is subdued presents execution risk for anticipated margin expansion in 2027.