Does Zillow Have Big Upside? This Analyst Feels ListHub Fears Are Overblown
On March 26, The Benchmark Company released a bullish note, "ListHub Fears Overblown, Synergistic Opportunities Underappreciated," on online real estate portal Zillow Group Inc (NYSE: Z).
The backdrop of the report is that a judge had ruled earlier that Realtor.com's ListHub business unit, now owned by News Corp. (NYSE: NWSA) (NYSE: NWSB), has the right to cancel its listing agreement with Zillow's newly acquired Trulia.
ListHub - Short-Term Negative Only
"Several media outlets have reported that 25% of Trulia's listings and 'hundreds of thousands' of Zillow's listings could be at risk," according to Benchmark's Daniel Kurnos.
However, he views "ListHub -- and consequently Realtor.com -- as the primary loser in the negotiations," for two simple reasons:
1) Realtor.com's data advantage will be steadily eroded by increasing MLS direct feeds to the Zillow Group;
2) The fact that most of the top MLSs and brokerages are working directly with Zillow reinforces our thesis that advertisers cannot afford to avoid the Zillow Group platform.
Zillow has traded in a wide 52-week range of $83.99 - $164.90, and has a short float of 28 percent of its shares.
Benchmark - Zillow: Buy Rating, $155 PT
- Based on 2016 Benchmark estimates, "Zillow trades at 7x EV/Revenue and 25x EBITDA, with revenue and EBITDA growth estimated at around 37% and 95%, respectively."
- Kurnos noted, "Quarterly results and metrics have indicated powerful momentum, which could be sustained."
- Benchmark's $155 PT, "is based 10x [its] 2016E EV/Revenue, which has been the most consistent multiple the market has assigned to Zillow prior to the merger."
Valuation - Deeper Dive
Benchmark - Investment Thesis
- Benchmark noted strong growth trends, "2014 growth remained strong at 65% y/y and is expected to remain above 35% y/y on an organic basis through 2016."
- Zillow estimated that there are over 1 million commission earning real estate agents in the U.S. and currently has only 125,000 signed up, which implies a long runway for future growth.
- Zillow's "consumer centric" portal has a first mover advantage, and the Trulia acquisition just adds to the value proposition, leading to increasing advertising revenues.
- Zillow is has ramped up spending in "engineering, advertising, sales force expansion and rentals…" which Benchmark believes is "warranted to protect Zillow's first-mover advantage."
- Benchmark also noted, "As Zillow adds more services, the potential to cross sell among products increases and the likelihood of churn declines."
Benchmark - Zillow Risk Factors
- In order for Zillow shares to move higher, "Premier Agent and ARPU momentum must continue."
- Notably, Benchmark believes that "minor hiccups could send the stock lower."
- Macroeconomic headwinds such as a recession, or housing downturn could negatively impact Zillow's adverting revenues.
- "Building traffic and monetization technology requires capital…"
The biggest short-term challenge -- the next six to nine months according to Benchmark -- still appears to be Zillow's ability to continue to sign new MLS listing agreements, at a pace acceptable to Mr. Market, in order to replace the syndicated data which will no longer be available via ListHub.
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Latest Ratings for Z
|Jul 2016||Morgan Stanley||Maintains||Overweight|
|May 2016||Cowen & Co.||Upgrades||Underperform||Market Perform|
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