Zillow Price Target Slashed 33% At This Wall Street Firm
Last Friday, Cowen and Company analyst Thomas Champion published a report downgrading Zillow Group Inc (NASDAQ: Z) from Market Perform to Underperform (Sell).
Champion estimated "that subs growth declines to 9 percent in 2Q and 3 percent in 3Q. Low subs growth means average spend (ARPA) will need to be the primary lever of topline growth."
He noted another troubling trend, "Trulia desktop Unique Visitors (UVs) declined y/y the last four months; on the mobile side, user growth has decelerated the last three months."
Source: comScore; Cowen and Company
Champion feels that Trulia strategy may need additional marketing support in order to reverse the trend and combat an "insurgent" Realtor.com.
Tale Of The Tape
During the past 52 weeks, Zillow has traded in a range of $75.77–$148.54 per share. As of this writing on Monday at 11:22 a.m. EST, Zillow shares are trading down at around $80.02.
Cowen On Zillow: Downgrade Hold To Sell, Lower PT From $90 To $60
The new Cowen target price represents a ~29 percent potential downside in the shares from the price of $83.08 per share.
Cowen's $60 PT is based upon its discounted cash flow model (DCF), utilizing the new "more conservative" EBITDA estimates below, and indicates a $60 result, now the new price target.,/p>
Champion noted that "Z trades at 6.4x 2016 revenues and 33x EBITDA on our Cowen estimates versus a group average of 2.8x and 15.2x, respectively. Even using Consensus estimates, Z trades at 5.8x '16 revenue and 24.8x EBITDA (58 percent premium)."
According to the report, the mean PT for Zillow is currently $109 per share.
Cowen Downgrade Rationale
Cowen lowered its 2016E revenue to $781 million from $819 million, which was still below the consensus estimate of $870 million, which would represent a 31 percent Y/Y increase. Champion noted, "Consensus appears to bake-in ~40 percent y/y ARPA growth if subs are flat, more than 3x the historical trend."
Cowen also lowered its 2016E EBITDA forecast from $200 million to $152 million, based on Trulia synergies of only $50 million vs $100 million, while also noting the announced departure of the Zillow CFO.
Cowen Base-Case Assumptions
Cowen's forecast calls for 12 percent annual top-line growth from 2015–2020, reaching $1.2 billion by 2020.
Cowen estimates that Zillow adjusted EBITDA will climb from $81 million in 2015 to $528 million in 2020, an increase of ~8x.
This implies that margins would also climb from an estimated 12 percent in 2015 to about 45 percent, which is the high end of the 40 to 45 percent range that Cowen feels is Zillow's long-term target.
Cowen Bottom Line: A Risky Short
Champion noted that with "the top ten shareholders controlling ~60 percent of total shares outstanding, and short interest already high, this [Zillow] may not be the easiest name to short and could be volatile on any positive news."
Zillow is due to report earnings after the bell on August 4, and one upside risk to the revised $60 PT would be if top-line agent growth does not accelerate, which would result in a higher Cowen DCF model value.
Image Credit: Public Domain
Latest Ratings for Z
|Jul 2016||Morgan Stanley||Maintains||Overweight|
|May 2016||Cowen & Co.||Upgrades||Underperform||Market Perform|
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