Analysts Ask: Where Are Zillow Shares Headed?
On March 13, JMP Securities published a note which helps to answer the question that is on everyone's mind in light of the recent court ruling allowing News Corp (NASDAQ: NWS) (NASDAQ: NWSA)'s ListHub to cancel its listing agreement with Zillow Group Inc (NASDAQ: Z)'s Trulia business unit on April 7, 2015.
So, which direction will Zillow shares be headed: up or down?
A Closer Look
Zillow maintains a "living database" of over 110 million U.S. homes and generates revenue by providing advertising solutions to real estate and mortgage agents.
During the past 52-weeks, shares of Zillow have traded in a range of $80.74 - $164.90, with a Beta of 1.45.
The previous close of $105.48 is 30.6 percent above the one year low, and still almost $60 per share off the high end.
JMP Securities - Zillow Group: Reiterates Outperform, $145 PT
- In 2014, "the company had revenue of $326 million, up 65% Y/Y, with Premier Agents totaling 62,305, up 29% Y/Y."
- For 2015, [JMP projects] Zillow Group revenue of $737M (+27.6% Y/Y), EBITDA of $149M (20.2% margin), and PF EPS of $0.95.
- JMP's "$145 price target is based on a DCF analysis with a WACC of 10%, a 12.0x terminal multiple, and three-year revenue and EBITDA CAGRs of 30% and 74.5%, respectively."
- JMP's justification of its PT is "based on the large opportunity within online real estate, the potential for sustainable growth across both businesses, and strong management."
JMP - The Judge's Ruling: Now What?
- JMP noted that "a San Francisco state judge denied Zillow's request for a preliminary injunction against ListHub terminating its contract with Trulia ~15 months early."
- "As a result, Trulia and ListHub agreed to terminate their Platform Services Agreement (PSA) on April 7, the same day that Zillow transitions from ListHub."
- "…Trulia's transition is likely earlier than the company expected, which could impact overall listings quality during the seasonally strong spring selling season as we believe ListHub accounts for 25%+ of Trulia's listings."
- JMP stated, "…given that Trulia currently has direct feeds from 125 MLS networks and 12,000+ brokerage partners, [JMP believes] the impact is likely to be minimal and potentially a better solution for Zillow in the long term."
- "Trulia rentals are now powered by Zillow and by early April, Zillow and Trulia's listings will primarily be sourced via direct connections with MLS networks and brokerages."
- "We expect Zillow to transition its ad products infrastructure to Trulia in the coming weeks/months, with early results likely by 2H15."
JMP - Risk Factors
- "1) Loss of consumer mind share, should Zillow's ‘living' database of 110 million homes fail to keep pace with current market conditions"
- "2) Increasing competition, impacting overall growth of consumers and Premier Agents"
- "3) Lower overall ROI for agents if the number of leads declines"
- "4) Real estate brokers removing listings from Zillow's database"
- "5) A worsening of the [macro economy] and a further weakening of the real estate market; and"
- "6) Increasing investments from marketing and other costs impacting overall operating and EBITDA margins."
JMP - Big Picture
- While noting that "there may be a near-term impact to Trulia's listings data post April 7th, [JMP believes] "Trulia has significantly reduced its dependency on ListHub given the launch of its Trulia Data Connect 1.5 years ago."
- "Since then, Trulia has connected with more than 12,000 brokers in less than one year after launching Data Connect; Trulia added 69 new MLS partners in 2014 resulting in 125 direct MLS connections. As a reminder, we believe the top 200 MLS networks of the ~880 in the U.S. account for ~90% of listings."
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