Zillow Stock: Secular Growth, Trimmed Borrowing Costs Ahead

imageStock Markets6 minutes ago (Sep 23, 2021 01:31PM ET)

(C) Reuters. Zillow Stock: Secular Growth, Trimmed Borrowing Costs Ahead

Zillow (ZG) is a digital real estate platform that provides user-friendly buying, renting, financing, and other features.

I am bullish on the stock. (See Zillow stock charts on TipRanks)

Recent Performance

Zillow stock has outperformed the S&P 500 by more than 50% over the past five years, but has suffered in 2021, and is currently down by 27% year-to-date.

The stock is highly correlated with anticipated property demand, which has been one of the main detriments to its performance in 2021, as the market’s fear of inflation has been a key topic of debate.

However, Zillow could be a great dip-buy; it’s producing solid growth while the effect of the cyclicality in property demand on the stock will be normalized in time.

Investors need to remember that Zillow doesn’t have the same characteristics as other property stocks such as REITs or REOCs. Zillow doesn’t need a low-interest-rate environment to thrive; it simply needs high transactional flow between buyers, sellers, and tenants.

You could argue that the stock is more reliant on real GDP growth than interest rates.

Earnings & Outlook

Zillow produced solid revenue growth in Q2, with a 70.5% year-over-year increase.

Visitors increased by 10% over the past year, while average unique users increased by 5%. Zillow also managed to post an adjusted EBITDA of $183 million, and a net income of $10 million in Q2.

Zillow’s management has upgraded its Q3 guidance, with revenue of up to $2.1 billion anticipated versus its previous estimate of $1.4 billion.

Value Drivers

Continuously improving on product integration is setting Zillow apart. Rental Inforum has assisted property managers in better understanding consumer behavior, 3D imaging is helpful for interested parties who are travel or time-constrained, and efficient agent allocation also makes for a more comprehensive, and prompt, buying/renting experience.

Lastly, continuous partnership building with brokers and app enhancements could provide valuable synergies, and drive traffic to Zillow’s platform.

Key Metrics

Balance sheet improvements are evident. Zillow had a negative interest coverage ratio in 2020, and now earns almost two times its interest due. Considering the company’s interest coverage ratio has improved, its likely that its 6.2% borrowing rate will be trimmed, which could mean that excess residuals could be available to investors.

Zillow has sound margins. It has a gross margin of 49.9%, an operating margin of 8%, and a net profit margin of 3.7%. Zillow is primed for expansion considering its margins, it could re-invest capital with ease considering its cash and equivalents of $4.6 billion.

Wall Street’s Take

Wall Street thinks the stock is a Moderate Buy, with 12 Buy ratings, two Hold ratings, and two Sell ratings assigned in the past three months. The average ZG price target of $151.93 suggests 61.5% upside potential.

Bottom Line

Zillow could be a real opportunity. Secular industry growth and GDP growth should assist with furthering its top-line performance, while expansion and cost of debt trimming are possible if you consider the firm’s profitability income margins.

Disclosure: At the time of publication, Steve Gray Booyens had a long position in ZG.

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Zillow Stock: Secular Growth, Trimmed Borrowing Costs Ahead

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