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 NWS NWSA's ListHub to cancel its listing agreement with Zillow Group Inc 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.
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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