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Zillow: With Stock Down 67%, Is the Risk Worth the Reward?

Shares of the online real estate platform provider Zillow (NASDAQ:ZG) (NASDAQ:Z) are under pressure. Investors aren’t impressed despite the company’s focus on eliminating housing market risk from the balance sheet by exiting its iBuying operations (purchasing and selling homes directly through Zillow Offers). 

It’s worth noting that Zillow stock has lost more than 40% of its value this year and is down about 67% over the past year. 

Let’s investigate some of the factors that are hurting Zillow stock. 

Near-Term Challenges

Zillow delivered better-than-expected Q1 financials. Revenue benefitted from a faster-than-expected unwind of the homes segment and higher home resale prices. Further, improved revenues in the IMT (Internet, Media & Technology) segment supported overall sales.

While Q1 sales topped Street expectations, weak Q2 guidance, macro headwinds, and a choppy housing market outlook remains a drag.

In response to its Q2 guidance, Stifel Nicolaus analyst Scott Devitt stated that the mid-point of Zillow’s Q2 revenue forecast range of $903-$1,031 million reflects a year-over-year decline of about 26%. Further, it is significantly lower than the consensus estimate of $1.8 billion. 

Devitt, who recommends a Hold on Zillow’s Class A shares, added that second-quarter guidance reflected “the pull-forward in home sales in 1Q, as well as slower growth expectations for the core IMT business.” Taking a cautious stance, the analyst lowered his Q2 and FY22 estimates and reduced his price target. 

Echoing similar sentiments, Jefferies analyst John Colantuoni expects macro headwinds, including higher mortgage rates, to negatively impact Zillow’s performance. However, Colantuoni views Zillow’s risk-reward as attractive given the low valuation and the company’s ability to generate solid cash (ended Q1 with cash and investments of 3.6 billion). 

Colantuoni stated, “We continue to believe owning Z will reward the long-term holder, but think macro headwinds are likely to curb near-term stock performance despite all-time low valuation.”

Bottom Line

Zillow is a leading player in the online real estate space. Its shareholder-friendly moves, including the authorization of an additional $1 billion share buyback plan, and the wind-down of its iBuying operations, are encouraging.  

However, near-term headwinds like fewer new for-sale listings, tight inventory, and a slowdown in refinancing activity amid higher mortgage rates could continue to play spoilsport in the short term.  

Due to the near-term challenges, most analysts remain sidelined on Zillow stock. It sports a Hold consensus rating based on five Buy, 13 Hold, and two Sell recommendations. Meanwhile, Zillow stock has an underperform Smart Score of 2 out of 10 on TipRanks. 

The average Zillow price target of $50.87 implies 36.1% upside potential from current levels.  

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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