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.

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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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