Morgan Stanley Faces Uncertainty About Zillow

In a report published Thursday, Morgan Stanley analyst Scott Devitt reiterated an Underweight rating on

. In the report, Morgan Stanley noted, “Zillow added over 3,500 Premier Agents in CQ4 despite its seasonal slowdown in traffic, while it raised ARPU by 3% Q/Q and 1% Y/Y on the higher subscriber base. Zillow's plans to increase advertising spend to $65MM in 2014E from ~$40MM in 2013 will weigh on near-term profitability, but its steady unique user growth suggests that it continues to see strong ROI from both online and offline campaigns. Zillow grew its user base by ~60% Y/Y in 2013, but it believes that prospective home shoppers (+80%) and agent contacts (+70%) grew even faster. The outlook for adjacent businesses like rentals / mortgages also appears to be growing increasingly bright; the disclosure that rentals generate ~2x the leads of real estate suggests that rentals could blossom into a big business down the road.” Zillow closed on Wednesday at $89.85.