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Morgan Stanley's New Valuation Of Zillow Prompts Downgrade

Morgan Stanley's New Valuation Of Zillow Prompts Downgrade

Zillow Group Inc (NASDAQ: Z) (NASDAQ: ZG)'s new home buying and selling business deserves credit, but should be viewed as a lower quality and riskier business on a valuation basis, according to Morgan Stanley.

The Analyst

Morgan Stanley's Jonathan Lanterman downgraded Zillow Group from Overweight to Equal-weight with a price target lowered from $55 to $50.

The Thesis

Lanterman's new $50 price target is based on a sum-of-the-parts model that values Zillow's core business, advertising-based internet media business and tech business at $47 and the new home-flipping business at $3 per share, the analyst said in the downgrade note.

The home-flipping business comes with multiple "unanswered questions" that could impact current expectations, Lanterman said:

  • Will Zillow be the first party for home flips or merely act as a market maker with a smaller cut?
  • How quickly can Zillow expand to new markets and at what cost?
  • What impact will the new business have with agents on the platform?
  • What are the benefits for Zillow's core premier agent revenue?

A more bullish stance on Zillow's stock could be established if the following occurred, the analyst said:

  • Evidence that lead conversion is resulting in sustainable pricing power.
  • Zillow's home-flipping business shows potential for real earnings.
  • Srong rentals revenue growth and a corresponding margin expansion.
  • A successful launch in at least one international country.

Price Action

Shares of Zillow Group were trading lower by 1.64 percent at the time of publication Wednesday morning. 

Related Links:

Morgan Stanley: Zillow Offers Attractive Entry Point For A High-Quality Asset

How The Pace Of Home Value Growth Compares With The Pace Of US Wage Growth

Latest Ratings for ZG

Mar 2020BenchmarkMaintainsBuy
Feb 2020CitigroupMaintainsNeutral
Feb 2020GuggenheimDowngradesBuyNeutral

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