Expectations may be too high ahead of Wednesday’s fourth quarter results from Zillow (NASDAQ:Z), according to analysts at Wedbush.
The California-based stockbroker commented in a note that the property app firm’s volumes could drop to “the more bearish assumptions for 2023”.
“We will be focused on management's comments around operating expense levels for FY23,” Wedbush analyst Jay McCanless wrote.
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“Our model assumes a decline in opex dollars to about US$1.4 billion in FY23 from our US$1.8 billion estimate for FY22. If Zillow (NASDAQ:Z) decides to maintain a higher rate of opex for future growth and/or maintaining market share, we believe our current FY23/FY24A EBITDA estimates may prove optimistic.”
Wedbush’s less-than-convinced stance goes against the market view on Monday, as Zillow (NASDAQ:Z) shares rallied in New York to climb some US$1.93 or 4.57% to trade at US$44.15.
“We will also look for comments on the current quarter especially with the backup in 30-year mortgage rates to 6.50% as of last Friday,” McCanless added.
“If mortgage rates stay at or above current levels, we anticipate existing home sales and purchase mortgage originations may fall into the more bearish assumptions for 2023.”
Wedbush doesn’t necessarily reckon it's all going to be doom-n-gloom for the property app, with a ‘Neutral’ rating going into Wednesday’s results.
The analyst added: “After all of this negative commentary we still think there are a few things that could go right in 2023. The first one is Zillow (NASDAQ:Z)'s balance sheet. Zillow (NASDAQ:Z) should be in a net cash position of ~US$1.5bn by FYE23 which could allow share buybacks and/or M&A.”
He continued: “Second, we think the OPEN partnership represents the best of both worlds for Zillow. A newly conservative approach to home buying from OPEN with limited to no balance sheet risk for Zillow.”
Lastly, he added that: “Zillow's decision to refocus on mortgages may turn out to be a 'found money' situation especially if mortgage rates resume the downward trend.”
“We do not expect Zillow to race to the top of the league tables, but are focused direct to consumer (DTC) mortgage platform with the Zillow brand name is not a bad tool for the kit,” the analyst wrote.
Wedbush’s ‘Neutral’ rating comes with a 12-month price target pitched at US$31.00 per share, compared to a current price of US$44.15.