Real Estate Shift to Online Channels, EBITDA Margins to Drive Zillow's Growth, Analyst Upgrades Stock

Evercore ISI Group analyst Mark Mahaney upgraded Zillow Group, Inc ZG from In-Line to Outperform and raised the price target from $34 to $61.

On a macro level and leaning heavily on the work of EISI Homebuilding Analyst Steven Kim, the analyst anticipates Q123 being the trough quarter for residential real estate in terms of EHS (existing homes sales) and home prices and see tentative signs of a rapid recovery. 

Given what the analyst historically tracked as a very high correlation between EHS and Zillow's Premier Agent Revenue, he would anticipate top-line trends for ZG starting to inflect in Q223 positively. 

Given ZG's relatively robust business model, that positive top-line inflection should quickly translate into a bottom-line inflection. 

As the consistently leading Online Real Estate information and marketing platform for consumers and real estate agents, the analyst believes Zillow should fully participate in the real estate market recovery. 

The analyst's analysis of third-party Web and App data shows little change in Zillow's powerful market position over the past several years, with Zillow accounting for 50%+ of all Online real-estate-related traffic. 

Product initiatives and offerings that Zillow has invested in (in Touring, Financing & Seller Solutions) could potentially set up Zillow for more robust growth and profitability in a post-recovery market.

The analyst still believes there is a reasonable valuation upside from current levels. Zillow's fundamentals have been highly volatile over the last several years. The company's ill-fated entry into and exit from the iBuying market, dramatic demand swings during the Covid, and the recent collapse of the residential real estate market partly explained the volatility.

All this created a materially adverse inflection in Zillow's fundamentals, from close to 20% Y/Y core Revenue growth in Q321 to over 20% Y/Y Revenue declines by Q422, with the critical IMT segment EBITDA margins declining, leading to sizeable cost actions. 

The analyst believes the housing market is either already beginning to recover or will very soon do that. The ongoing secular migration of residential real estate to Online channels, a significant TAM, the ability to sustain 40%+ EBITDA Margins, and optionality for itself through product development and acquisitions are likely to drive a stock recovery.

Price Action: Z shares traded higher by 4.33% at $44.07 on the last check Monday.