'Zillow Still Has Plenty Of Rate Headroom,' Benchmark's Kurnos Says

Zillow Group Inc Z reported mixed 1Q16 results, with a revenue beat and an EBITDA shortfall. Benchmark's Daniel L. Kurnos maintained a Buy rating for the company, with a price target of $34. The analyst commented that Zillow “still has room to run over the medium-term on the rate front” and the News Corp NWSA litigation would likely be resolved this year.

Zillow reported revenue of $185.9 million, beating the Street estimate of $176.6 million. The company’s EBITDA was significantly short of Street expectations on account of higher litigation costs and marketing spend pull-forward.

“However, given flat PA sub growth, we believe the quarter confirmed our thesis that Zillow still has plenty of rate headroom (ARPA growth was up 40% y/y on a pro forma basis in the quarter, exceeding our expectations),” analyst Daniel Kurnos wrote.

Projections For 2016

Zillow raised its full-year revenue guidance, reflecting a recovery in the Trulia funnel as well as an overall 60 percent increase in lead generation.

Kurnos raised the 2016 total revenue estimate from $810 million to $833.7 million, representing 29 percent y/y growth, which he believes would be driven by 39 percent y/y Marketplace growth, offset by a 33 percent y/y Display decline.

Beyond 2016

“We have been consistent in our belief that the Zillow long-term story could be supported by little to no PA sub growth coupled with steady price hikes for power brokers,” the analyst commented. He forecasted 20 percent PA revenue growth through 2017, reflecting ARPA growth of 40 percent in 2016 and a blended 25 percent in 2017.

“With the vast majority of direct connect completed, the narrowing of the information gap with Realtor has led to a significant improvement in lead quality. Furthermore, with the top brokers acquiring more inventory, conversion metrics have improved as well,” Kurnos mentioned.