‘The power pendulum has clearly swung towards agents and away from brokerages,’ says Stephens analyst
Real estate is changing.
That’s the conclusion of John Campbell, a Stephens stock analyst who’s spent some time recently searching his soul about the industry he covers.
To be fair, Campbell’s precise comments, in a note released Monday, were a bit more nuanced: “While consumers have been ready to embrace change, we do not believe that there was enough of a coordinated effort to deliver on that desire for change in the past,” he acknowledged. “Fast forward to today and we see existing industry players (Zillow, Redfin) with consumers at the center of their strategy, as well as new entrants finally starting to break through.”
Campbell has long been a Zillow ZG, -0.79% bull, and he still considers the company a leader. “We believe that Redfin RDFN, -1.77% and Zillow Z, -0.74% stand out as the clear longs from the standpoint of real consumer-driven change,” he said.
He gave Zillow an overweight rating with a higher price target, of $57 — about 25% upside from recent levels — for a few reasons. Among them: it’s in a unique position to make iBuying work, given its national reach and “economies of scale” that will bring profits, even if at lower margins. “Most importantly, we believe that iBuying opens to the doors to so much more for Zillow, particularly the sell-side lead opportunity,” Campbell wrote.
Specifically, Zillow could dominate the add-on services that anyone in the market to buy or sell a home needs: mortgage lending, title insurance, and so on, he said.
But Zillow is so powerful it’s disrupting the entire industry as it goes, Campbell argued. “Partly due to Zillow, we believe that the power pendulum has clearly swung towards agents and away from brokerages.”
That led him to cut his rating on Realogy RLGY, -0.71% to equal weight from overweight, and to halve his price target to $8 from $16. He kept his equal weight rating on RE/MAX Holdings RMAX, +0.94% but cut its price target to $37 from $45.
It’s important to note that at least one other analyst thinks the outlook for Realogy is much worse than an “equal weight” rating would imply.
“Make no mistake, the situation at RLGY is dire,” wrote analyst Brad Safalow, CEO at PAA Research, with a short call in response to the most recent earnings report from Realogy.
“Any combination of execution missteps, acceleration of share loss, or weakening of the macro-economic environment could put the company under severe duress,” he said. “In our base case forecast we think leverage could widen out to 7(times) in the next 18-24 months. This suggests that downside in RLGY shares could be anywhere from 50-100% from current levels. In order for RLGY to truly compete in today’s real estate market, we think the company needs to be restructured.”
And what of Redfin, the second company that Stephens’ Campbell calls a “clear long”? That’s a u-turn for Campbell: He upgraded it to overweight from underweight, while hiking his price target to $23 from $18. Redfin shares have recently been trading at about $17-18, so that would be a gain of nearly 30% from here. (Here’s an earlier story from when the analyst first started coverage: Redfin stock initiated at underweight, with a 25% lower price target.)
The company’s “consumer-focused strategy is unique in the space,” Campbell said, which “has put the company in a great position to win over the long run. The market share potential (only 0.83% share today) is compelling.”
What’s more, Redfin Direct — a service that enables home buyers to make offers without being represented by an agent, allowing the commission savings to be passed on — is “a potential game changer,” Campbell said. MarketWatch was the first to break news of this new offering.