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Does Zillow Have Big Upside? This Analyst Feels ListHub Fears Are Overblown

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Does Zillow Have Big Upside? This Analyst Feels ListHub Fears Are Overblown
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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.

z_-_finviz_benchmark_march_26.jpg

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.

Related Link: Analysts Ask: Where Are Zillow Shares Headed?

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

z_-_benchmark_target_valuation_exhibit.jpg

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…"

Investor Takeaway

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.

Image credit: Public Domain

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: Daniel KurnosAnalyst Color Long Ideas Price Target Reiteration Analyst Ratings Trading Ideas Real Estate Best of Benzinga

 

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