Following a downgrade by Merrill Lynch analyst Henry Blodget, shares of Homestore.com, Inc. (Nasdaq: HOMS), fell $4.28 to close at $31.01 on Monday.

Homestore, operator of Realtor.com, fell after Blodget cut his recommendation from a "buy" to "accumulate." Earlier, in a report issued in May, Blodget had recommended Homestore as a "buy" while questioning pro forma figures from the company.

This time, Blodget said "we are downgrading HOMS to an intermediate-term Accumulate. The stock has been very strong of late, and we do not find the risk/reward at this level compelling enough to continue to warrant an intermediate-term Buy rating. We still believe there could be intermediate-term upside, so we are maintaining our Accumulate rating.

"At $35," Blodget's report continued, "HOMS trades at 37X our 2002 pro-forma EPS estimate of $0.95, which is not tax-affected and excludes stock-based operating expenses. Our tax-affected 2002E operating EPS estimate (which includes stock-based operating expenses) is $0.29. This implies a 2002E P/E multiple of about 120X -- a healthy premium to EBAY's 2002E EPS multiple of about 80X."

Blodget said subscription revenue represented 65% of the company's total income and that subscription income had risen approximately $10 million in each of the last five quarters.

The concern, said Blodget is that the company now has 350,000 subscribers, meaning that much potential growth has already taken place.

"The company," said Blodget, "continues to generate incremental revenue per subscriber through price increases and the rollout of additional products, and continues to develop other subscription markets, such as rental agents and home builders. This said, we do not yet have enough detail about the composition of the professional services revenue line to be comfortable that the company can maintain similar sequential revenue increases for the next several quarters."

Blodget said that ad revenue -- 35 percent of Homestore's income -- was likely to fall 10 to 20 percent in the short term. However, Blodget said Homestore "is sheltered from the storm" because it has few dotcom ad customers, a "high-quality inventory," and the "addition of inventory from AOL."

"These factors," said Blodget, "have allowed the company to maintain flat advertising revenue when the revenue of most other online ad/media companies has dropped."

Blodget gained fame as an analyst when he predicted that Amazon would reach $400 a share -- and it did. However, as the market for high-tech stocks has declined, his record has been mixed. According to The New York Times, Blodget has recommended such firms as Pets.com and eToys, both of which have closed. (See: "The Shifting Fortunes of a Prognosticator," July 1, 2001)

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Published: July 10, 2001

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