SunTrust's Peck Reviews Zillow's Q3 Results

• Zillow Group, Inc. ZG shares have slipped from $34.89 on October 9 to $30.99 on November 3, after rising from below $23 in August.
• SunTrust Robinson Humphrey’s Robert S. Peck maintained a Buy ratong on the company, with a price target of $33.
• While the company beat expectations in 3Q, revenue and EBITDA estimates for 2016 may decline, since they were already incorporating revenue growth and margin expansion due to cost synergies, Peck stated.

Zillow reported its 3Q revenues in-with estimates while beating on the EBITDA front. The company has guided to marginally lower revenue for 4Q, while its EBITDA margin guidance of 13 percent at the mid-point is down about 1 percent from the 14 percent implied by 2Q guidance, analyst Robert Peck noted.

Peck enumerated the 3Q positives as:

1. About 29 percent growth in Marketplaces, agent revenue up 25 percent, following 38 percent growth in 2Q and 59 percent in 1Q; ARPA rose 20 percent versus 18 percent in 2Q
2. Leads grew 36 percent y/y, faster than traffic, with mobile remaining the key driver
3. Existing agents contributed 69 percent of bookings, versus 65 percent in 1Q
4. Continued momentum in mortgages and rentals

Following management’s discussion on the call, Peck expects revenue and EBITDA estimates to decline for 2016. He explained, “While commentary suggests revenue growth can accelerate and margins are supported by the costs synergies, we note that investor estimates already accounted for this and we think were somewhat stale regarding the expected cost synergies.”

“Accounting for investments in growth, we now estimate 2016 EBITDA will be ~$60M higher vs. 2015E (vs the ~$100M synergies),” the SunTrust report added. Going forward the estimates reflect headcount growth and increased spending, while still incorporating improving margins.

Moreover, new product initiatives are also expected to accelerate, with the integration now having been completed.