The COVID-19 pandemic has had a devastating impact on real estate utilization, particularly regarding retail, office, and health care assets. In fact, the work-from-home culture ushered in by the colossal public health crisis has weakened demand for primary revenue generating markets—office and rental housing assets. Densely populated markets were more affected versus suburban areas because extended remote working motivated people to seek larger living spaces. The industry’s weakness is evidenced by iShares U.S. Real Estate ETF’s (IYR) 7.2% loss in value over the past year.
One factor that has worked in favor of this industry is the rapid adoption of digitalization in business processes. Real-estate technology companies have automated their tasks in operations, management, marketing and finance to ensure faster turnarounds and better return on investment. However, the real-estate technology market is expected to be disrupted by internet giants that are continuously working toward transformation and the streamlining of in-person interactions.
Although coronavirus vaccination drives are underway, the industry is still exposed to the risk of a slower than expected economic recovery, an outcome that has been heightened by a recent surge in coronavirus cases across the U.S. As a result, S&P Global Ratings has maintained a negative ratings bias for the North American REIT sector in 2021.
Against this backdrop, we think real estate technology stocks Zillow Group, Inc. (Z), Opendoor Technologies Inc. (OPEN), and Redfin Corporation (RDFN) are best avoided now.
Zillow Group, Inc. (Z)
Z is a digital real estate company that operates through three segments: Homes, Internet, Media & Technology, and Mortgages. The company owns and operates a portfolio of real estate and home related brands, focused on all stages of the home lifecycle: renting, buying, selling and financing.
Last month, the U.S. District Court for the Western District of Washington approved a proposed class action against Z by the Rosen Law Firm, P.A.
On February 10, Z entered an agreement to acquire ShowingTime.com, an online scheduling platform for home showings, for $500 million. This will create a significant burden on the company’s financials, which are already under stress due to the pandemic.
The pandemic negatively affected Z’s revenue growth. The company’s total revenues for its home segment decreased 49.6% year-over-year to $304.15 million in the fourth quarter, ended December 31. Its total revenues fell 16.4% from its year-ago value to $788.95 million over the same period.
Analysts expect Z’s EPS to decline at a CAGR of 21% over the next five years. A consensus revenue estimate of $1.09 billion in the current quarter, ending March 31, represents a 3% decline from its year-ago value. The stock has lost 13.8% in value over the past month.
Z’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of D, which equates to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Z has a grade of D for Stability and Quality. Of the 68 stocks in the D-rated Internet Industry, it is currently ranked #51.
In total, we rate Z on eight different levels. Beyond what we stated above, we have also given Z grades for Growth, Momentum, Value and Sentiment. Get all of Z’s ratings here.
Opendoor Technologies Inc. (OPEN)
Based in Arizona, OPEN is a digital platform for residential real estate that enables consumers to buy and sell homes online. The company acquires homes directly from individual sellers and resells those homes after making renovations and repairs, to individual consumers and institutional investors.
On September 15, 2020, OPEN entered a merger agreement with SCH, a special purpose acquisition company, raising approximately $1 billion from the transaction. The merger was closed on December 18, after which the company began trading on NASDAQ.
Because OPEN’s revenues are dependent on available inventory levels, its near-term revenues have been pressured by limited inventory. Accordingly, its decision to temporarily pause home buying, and its subsequent sell down of homes in its inventory, drove a significant decline in OPEN’s revenue in 2020. For the fourth quarter (ended December 31, 2020), total homes sold was 849, down 83.1% versus the prior year period. OPEN’s revenues have decreased 80.2% year-over-year to $248.89 million in the fourth quarter. Its gross profit has decreased 48.1% from its the year-ago value to $38.37 million, yielding a gross margin of 15.4%, down 950 basis points year-over-year. Its loss from operations has increased slightly to $66.12 million over the same period.
Analysts expect OPEN to report a loss per share of $0.48 in the current quarter, ending March 31, 2021. The stock has lost 17.3% over the past month.
OPEN’s poor prospects are also apparent in its POWR Ratings. The stock has an overall rating of D, equating to Sell in our proprietary rating system. OPEN has an F grade for both Value and Growth. In the C-rated Internet - Services industry, it is ranked #41 of 44 stocks.
Click here to see the additional POWR Ratings for OPEN (Momentum, Stability, Quality and Sentiment).
Redfin Corporation (RDFN)
RDFN is a technology-oriented residential real estate brokerage company that operates in the United States and Canada. It is an online marketplace that offers brokerage, iBuying, mortgage, and title services, along with a host of online tools to consumers, including the Redfin Estimate.
RDFN reported a decrease of 10.4% sequentially in monthly average visitors to 44.14 million in the fourth quarter, ended December 31, 2020. Its gross profit has decreased 13.9% from the previous quarter to $80.12 million, while its income from operations has declined 30.7% to $80.12 million over the same period. Its EPS declined 63.3% sequentially to $0.11 over the three-month period.
Analysts expect RDFN to report a loss per share of $0.34 in the current quarter, ending March 31, 2021. The stock has lost 25% in value over the past month.
RDFN’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of D, which equates to Sell in our proprietary rating system.
RDFN has a D grade for Value and Stability. In the D-rated Real Estate Services Industry, the stock is currently ranked #35 of 44 stocks.
We also have given RDFN grades for Growth, Quality, Sentiment, and Momentum. Get all RDFN’s ratings here.
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
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Z shares were trading at $126.34 per share on Monday afternoon, down $8.82 (-6.53%). Year-to-date, Z has declined -2.67%, versus a 3.11% rise in the benchmark S&P 500 index during the same period.
About the Author: Rishab Dugar
Rishab is a financial journalist and investment analyst. His investment approach is to focus on quality stocks, trading at low prices, with business models that he readily understands.
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