A new rally in US housing could drive a 20% surge in Zillow stock, Bank of America says

Zillow

• Zillow's stock holds a 20% upside on the back of a potentially improving housing market, Bank of America said Monday. 
• The property-tech firm landed a double-upgrade of its rating to buy and a higher price objective of $42 a share.  
• BofA sees home transactions accelerating in 2024. 

It's time to purchase stock in Zillow, according to Bank of America which lifted its rating and price outlook on the property-technology firm as it foresees the housing market improving after a difficult 2022. 

Elevated interest rates stemming from the Federal Reserve's fight against decades-high inflation and home affordability at its lowest in 40 years make the investment bank cautious on real estate trends in 2023. 

"However, declines for mortgage purchase applications … have stabilized since October and unless rates materially spike, home volume trends should start to improve in 2Q23," research analyst Curtis Nagle wrote in a note published Monday.

BofA issued a double-upgrade of its Zillow rating to buy from underperform and bumped up its price objective to $42 a share from $22. 

The higher price target implied a 20% upside from Friday's closing price of $34.96. Zillow shares soared 8% on Monday after the investment bank outlined its view on the stock. 

BofA projects 2023 home transactions to slump 21% year over year, but then accelerate 10% in 2024 on lower home prices and mortgage rates. Some mean reversion should also help as volumes are 24% below the historical average. Higher transactions could result in at least an 11% gain for Zillow's revenues. 

Zillow is in the "early stages" of implementing several large and potentially key initiatives that could sustainably reaccelerate growth above the market pace, Nagle wrote. 

"Our estimates only assume minimal outperformance, but assets such as ShowingTime, 3D virtual tours and an increased focus on financing to identify high-intent home buyers could lead to higher conversions and revenue," he said. 

Zillow's long-term targets are "ambitious," but a 1 percentage-point share gain would increase its 2025 revenue estimate by 45%, BofA said. 

In a high-profile move in late 2021, Zillow shut the doors on its Zillow Offers home-flipping unit. The business based on algorithmic house pricing lost more than $881 million that year. 

Sales of new and existing homes dropped and home prices fell throughout the US last year as the Fed directed interest rates higher, cooling what was a hot market during a period of low borrowing costs tied to mortgages. Zillow stock plunged 49.8% in 2022, underperforming the 33% slide in the Nasdaq Composite. 

Zillow stock hit an all-time high above $212 in February 2021.