Wall Street is not reacting well to Zillow’s second quarter 2018 earnings report and the announcement of its acquisition of Mortgage Lenders of America, with stock plummeting more than 17 percent on Tuesday.

Following a major acquisition and the release of its second quarter earnings yesterday, Zillow Group stock is plunging south. Shares had fallen more than 17 percent to $48.71 from market close on Monday to 12:20 p.m. ET on Tuesday, wiping out nearly $1.6 billion in market cap overnight.

And Bank of America Merrill Lynch downgraded the publicly traded real estate technology company to “neutral” from “buy.”

Check out the following chart from financial data site YCharts showing Zillow’s market cap for the week leading up to and including Aug. 7, the latter the day of its earnings report and announcement it was buying Mortgage Lenders of America, an online lending company, for an undisclosed sum.

Zillow 5-Day Market Cap chart on Aug 7 2018

Credit: Ycharts

“I think the reason the stock is reacting the way it is, is because we lowered guidance due to one of our four marketplaces — rentals, about 10 percent of revenue — missing its revenue results, so we lowered guidance for the year,” said Zillow CEO Spencer Rascoff on CNBC, Tuesday morning.

“I don’t think the stock market is reacting negatively to our moves with the Mortgage Lenders of America acquisition, about which I am very excited.”

The downgraded Bank of America Merrill Lynch rating, specifically, is due to concern over Zillow’s business model shift, CNBC reported on Tuesday.

Zillow said it plans to acquire Mortgage Lenders of America to pair with its Zillow Offers direct-to-consumer homebuying and selling program.

In a note to clients obtained by CNBC, Bank of America Merrill Lynch analyst Nat Schindler said the integration of that new business poses a risk for 2019 results, at a time when Zillow is already under pressure.

“The quarter revealed challenges for multiple business segments that limit our optimism on FY19 upside,” Schindler said, in the note.

The company also announced its second quarter earnings as markets closed yesterday, reporting a net loss of $3.09 million and revenue of of $325.2 million in the second quarter, a 22 percent year-over-year increase and in line with the company’s revenue expectations.

The company’s biggest moneymaker was once again its Premier Agent advertising program, which accounted for $230.9 million in revenue.

Zillow Offers operated at a loss of $12.1 million, since it bought nine homes and sold none in the first quarter, according to the earnings report. Rascoff said, a quarterly update letter, it has since sold the nine homes and expects between $2 million and $7 million in revenue generated from the program in the third quarter and between $20 million and $40 million for the full-year.

Zillow CEO Spencer Rascoff

Zillow CEO Spencer Rascoff | Photo courtesy Zillow Group

“There’s a little bit of a revenue timing issue where we’re buying homes, but not closing on them, and therefore not reselling them, so revenue is basically pushed out a quarter,” said Rascoff on CNBC. “That contributed to the revenue guidance decline.”

In an interview with Inman on Monday regarding the company’s acquisition of Mortgage Lenders of America, Errol Samuelson, the company’s chief innovation officer, dismissed the notion that the acquisition of Mortgage Lenders of America was a remedial action to attack slow sale times of the Zillow Offers homes.

“We’ve been pleased with the way the Zillow Offers test has been going in the two markets — Phoenix and Las Vegas,” Samuelson said. “Things are going as well as we expected them to go and actually going quite well.”

Even with the recent tumble, Zillow stock is still up since the beginning of the year, when it opened on Jan. 2 at $42.30. It’s also up, year-over-year, when it was at $47.43 at this time last year.

A Zillow spokesperson declined to provide further comment beyond Rascoff’s appearance on CNBC and the results of its second quarter earnings.

Email Patrick Kearns

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