Is Zillow Stock (Z) a Buy, Sell or Hold?
Based on Zillow’s strong growth rate, a lot of investors are asking whether Zillow stock is a great buy, sell or hold. Does being the industry giant equate to being a best of breed stock? And does owning the market leader make good investment sense?
Let's find out! But first, let’s quickly review Zillow’s history.
History of Zillow – Is Zillow Stock a Good Investment
For decades, the housing market had been the sole domain of realtors, with property agents controlling the flow of information for rental and “for sale” properties.
However, the advent of technology changed all of that. With the entry of online real estate portals, the process of listing, buying, selling and advertising properties has become much more transparent.
Seattle based Zillow Inc. was launched in 2006 by founders of former Microsoft spin-off Expedia. Zillow trades under the stock symbol Z on the NASDAQ, and is an online real-estate industry service provider that delivers key information on real estate listings, homes and mortgages through its technology based platforms.
Zillow acts as a portal to connect homeowners, home buyers, sellers and other property owners with professionals in the real estate and mortgage domains.
Within a few years of being launched, Zillow grew rapidly to secure a spot on the top-5 list of its peers. As of 2014, Zillow is being ranked the #1 top real estate website.
A strategic partnership between Zillow and Yahoo, in July 2010 was a major factor in helping Zillow to accelerate its growth.
Judging By the Numbers – Is Zillow Stock a Good Buy?
As the chart below indicates, Z has had an enviable run over the last 3 years, posting gains of nearly 300% in price appreciation.
Judging from stock price movement alone, competitors Realtor.Com (MOVE) and TRLA have not had as much success.
However, since Zillow acquired Trulia, Inc. (Jul 28), the firm has lost nearly 13.73% of its stock value (the stock is trading at $138.30 at the time of this analysis).
More than 10% (10.47%) of that decline came immediately as a result of investors’ reaction to the acquisition announcement.
Interestingly enough, TRLA shares saw a spike on the announcement, a likely indicator that Z shareholders perceive the deal as being comparatively less accretive to them.
The stock also fell nearly 1% when it released its Q2 results, posting a larger loss than analyst expected for the period. According to the company's earnings announcement, 2 cents per share of the loss is attributable to higher commissions paid to its ad sales force. Q2 loss came in at 5 cents per share compared to 4 cents per share loss expectation.
Although the company reported a loss for the quarter, revenue was up an impressive 68% from the year-ago quarter.
Analysts were expecting revenue to come in at around $76.5 million, which would have resulted in a year/year growth of 62%, but the company handed in surprise revenue of $78.7 million.
More importantly, the company reported solid operating metric, including:
- 81.1 million average monthly users – an increase of nearly 49%
- a 46% rise in the number of subscribing agents – which came in at 56.8 million
While visits from mobile visitors doubled over the quarter, almost 62% of the company's quarterly bookings were attributed to a handful of key real estate agent clients.
The company has provided extremely optimistic forward guidance, upping its mid-point revenue target by 64% to between $87 million and $88 million.
EBITDA is projected to come in between $14 million and $15 million in Q3. Over the next year, the company is also expecting to increase spending on advertising to nearly $75 million, which bodes well for its marketing strategy.
Zillow’s Growth Strategy
In mid July 2014, Z acquired Canadian company Retsly, a technology company whose platform enables developers to build productivity tools for the real estate industry.
Then, in late July 2014, Zillow (market cap $6B) announced that it was acquiring industry number 2, Trulia Inc. (TRLA: NYSE) (market cap $2.3B) in a stock deal that's worth $3.5B.
This marriage will give Z a combined visitor tally of over 130 million per month.
In a resurging housing market, growing through mergers and acquisition (M&As) probably makes sense, especially since both Z and TRLA offer largely similar (though not identical) services to their clients. Both these acquisitions push Z's M&A quarry's to nine.
Critics see at least some opportunity for Z to grow its revenues within its existing portfolio of services, which goes largely untapped. The company currently offers a free home listing feature which also allows the listing agent of the property to be mentioned. Some analysts believe that charging for this feature could easily add to the company's bottom line, even without accounting for potential revenue growth through acquisitions.
While pursuing a strategy of growth by merging and acquiring may sound attractive to some investors, the history of M&As indicate that most M&A marriages end up in failure. Skeptics point to how the Chrysler/Daimler-Benz deal almost brought Daimler to ruin. And the AOL-Time Warner deal doesn't inspire confidence in M&As either.
The challenges cited include: Corporate culture, Technology, Accounting and Administrative practices and deep-rooted distrust and fear of job losses.
Still, the Z/TRLA deal may yet prove accretive to shareholders in both companies. According to some analysts, revenues from the combined entity will only account for about 4% of the massive $12 billion industry. This would indicate that there is still a huge untapped potential for online portals to grab additional market share away from traditional real estate marketing channels, including billboards, newspapers, direct mail and television.
But with long entrenched competitors like Homes.Com, Realtor.Com, Coldwell Banker, Century 21 and Re/Max to contend with, the final chapter in this battle for top honors in the online real estate space might not yet be written.
Technical Analysis on Zillow Stock
Since late 2013, the stock price has held up well against its 200-day Simple Moving Average (SMA), where it has found support through the better part of the first-half of 2014.
Since the second quarter of 2014 however, the stock has gained significant ground, moving from a close of $85.86 on March 27, to close at $160.32 on July 28 (the day the TSLA acquisition was announced).
The drop in share price as a result of the announcement saw the stock break support at its 9-day SMA, where it currently finds itself at $138.30 – perilously close to its 50-day SMA. Since April 2014 however, the stock has tested the 50-day support several times, but has always found support there, allowing it to bounce higher.
Technical investors may keenly watch to see if the stock breaks support at the 50-day SMA over the next several trading sessions. If it does, then it could re-visit the 200-day SMA at $98.21 as the next milestone.
Market Consensus – Is Zillow Stock (Z) a Good Buy and Hold? Or Should Investors Sell the Stock?
Following announcement of the takeover of TRLA, analysts from both Deutsche Bank and Needham downgraded Z from a "Buy" to a "Hold". RDC Capital Markets had previously downgraded the stock from "Outperform" to "Sector Perform".
Analysts at Raymond James maintained their "Market Perform" rating.
Investors need to take the latest financial results with a grain of salt, and consider Zillow stock a "HOLD" for now, based on the below factors:
- Hold on for the next few quarters to see if the Z-TRLA engagement is successfully consummated – without any legal hiccups and with no side effects
- Wait to see if the acquisition actually delivers top and bottom line growth for shareholders in the coming quarters
- Assess how Z does in its focus on increasing revenue through mobile dollars
- Before diving in to buy the stock, give competing sites like Homes.Com, Realtor.Com, and realtors like Century 21, Re/Max and Coldwell Banker a chance to show how they plan on countering the giant in the industry
According to publically available information, as of May 30th 2014 the Short % of Z's float represents nearly 45.20% of Z's shares, while insiders hold less than 40% of the shares. That's definitely something that investors need to consider before buying the stock.
Another very strong reason for investors to remain on the sidelines, or at least not commit any new money to Z, is because of insider stock sales.
According to market watchers, there have been 67 sales transactions by insiders (987,249 shares) over the last 3 months, compared to just 47 (399,030) purchases. Over a 12 month period, 185 sales (3,692,536) took place versus 166 (1,789,140) purchases.
This disproportionate selling by insiders should give investors pause before parting with their own money.