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Morgan Stanley Initiates On Zillow, Says Top Agents Will Drive Ad Growth

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On July 14, Morgan Stanley analyst Dean Prissman published a report, "Enabling The Best To Get Better" and initiated Zillow Group Inc (NASDAQ: Z) at Overweight.

Shares popped up over 3.8 percent Tuesday on this much-needed good news for beleaguered Zillow shareholders.

Zillow shares have struggled year-to-date following the Trulia merger, and have been negatively impacted this past week by the recent revelation that long-time CFO Chad Cohen is stepping down effective August 7.

Related Link: Why Did Zillow's CFO Just Resign?

Tale Of The Tape - Downward Trend YTD

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During the past 52-weeks, shares of Zillow have traded in a range of $77.62 to $164.90 and notably, Z shares are down ~50 percent from recent highs.


Top Agents Dominate Ad Spends

Prissman's relatively bullish Zillow thesis is based on proprietary "Alpha-Wise" research which indicates that, "Zillow's customer base is successful agents and [Morgan's] bottom-up analysis suggests they spend $30k per year each on advertising, implying Zillow's wallet share is a low 14%, with ample room to grow."

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Essentially, newer and less successful agents who can't afford to get Zillow exposure will be at an even greater disadvantage, while top agents can afford to spend more out of pocket.

Morgan Stanley - Zillow: Initiated Buy, $108 PT

Morgan's $108 target price represents a 28.4 percent upside based on the July 14, close of $84.11 per share. It is based upon Morgan's discounted cash flow (DCF) model and the "price target implies an EV/EBITDA multiple of 34x FY2016E vs. Z currently trading at 18x."

Prissman feels that "Zillow's dominant market position, a significantly underpenetrated market opportunity, and expanding margin profile," justify a premium valuation vs sector peers.

Rationale

Prissman noted, "Zillow's 2015 financials paint a complicated picture, with many distractions that make it hard to see the forest through the trees." However, Morgan Stanley "…views many of the issues as largely transitory."

Catalysts that could drive the stock price higher: "1) The potential for improved pro forma disclosures; 2) management color that trends at Trulia have stabilized; and 3) a successful integration of the Trulia and Zillow premier agents business (which is expected to be complete by the end of the year)."

Notably, "Zillow accounted for 36% of Internet enabled transactions in 2014, doubling its share year on year [for agents doing 10 or more sides]."

Top Agent Commission Split Advantage

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The data supports the thesis that top agents have "the wallet" to increase ad spending if they so choose.

Bottom Line

Morgan Stanley sees Zillow continuing to gain significant market share over time. When that is combined with "rational" higher ad spending by top agents, it results in Prissman forecasting that Zillow will achieve a 21 percent five-year revenue compounded annual growth (CAGR) and 49 percent EBITDA CAGR, with margins expanding to more than 40 percent.

Latest Ratings for Z

DateFirmActionFromTo
Jul 2016Morgan StanleyMaintainsOverweight
May 2016Cowen & Co.UpgradesUnderperformMarket Perform
May 2016BenchmarkMaintainsBuy

View More Analyst Ratings for Z
View the Latest Analyst Ratings

Posted-In: Chad Cohen Morgan Stanley TruliaAnalyst Color Price Target Initiation Analyst Ratings Real Estate

 

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