Should You Buy the Dip in Zillow?

Digital real estate company Zillow Group Inc. (Z), which is based in Seattle, Wash., operates real estate brands on mobile applications and websites in the United States. The company offers selling, buying, renting, or financing with…

transparency and a nearly seamless end-to-end service. Its portfolio includes Zillow, Zillow Offers, Zillow Closing Services, Zillow Home Loans, Trulia, StreetEasy, and HotPads. The stock has declined 16.7% in price over the past three months and 2.4% over the past month.

Last week, the company declared the suspension of its home-buying operation for the rest of 2021, which caused some analysts concern that Z has too many properties in its inventory, signifying a decline in demand. This caused the stock to decline 10% in price last week.

Furthermore, closing the last trading session at $92.21, Z is trading 55.7% below its 52-week high of $208.11, which it hit on February 16, 2021, signaling a downtrend. In addition, Z’s weak profitability and premium valuation could make matters worse.

Here’s what could influence Z’s performance in the upcoming months:

Business Headwinds

Last week, Z announced that it would not engage in any new contracts to buy homes through the end of 2021, potentially surrendering ground to rival iBuying businesses. The company is facing a large backlog of pending property transactions due to ongoing labor shortages. Moreover, variable material costs are hindering repairs and upgrades of purchased houses.

In addition, according to the U.S. Census Bureau, new house construction and building permit authorization declined in September versus the previous month due to a persistent labor shortage and supply constraints.

Weak Profitability

 

 

Z’s 8.2% trailing-12-month EBITDA margin is 25.3% lower than the 11% industry average. Furthermore, Z’s 3.7% trailing-12-month net income margin is 39.4% lower than the 6.1% industry average. Also, the company’s cash from operations stood at a negative $425.92 million.

Stretched Valuation

In terms of trailing-12-months EV/Sales, Z is currently trading at 3.30x, which is 26.8% higher than the 2.60x industry average. In addition, its 3.61x trailing-12-months Price/Sales is 109.5% higher than the 1.72x industry average. Furthermore, the stock’s 87.82x trailing-12-months non-GAAP P/E ratio is 345.3% higher than the 19.72x industry average.

Unfavorable POWR Ratings

Z has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering…

 

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