Dump Zillow (Z) Stock Before Bad Turns to Worse

The fall from glory has been painful, and it's not over yet

Congratulations, Zillow Group Inc (NASDAQ:Z). You had a good run there for a while.

Between late 2012 and mid-2014, the Z stock price rallied from $24 per share to highs around $165 a pop. Remember that? That was really something, Zillow. Kudos.

Sell Zillow Z StockUnfortunately, those days are over. Zillow stock is experiencing a painful reckoning; yesterday Z stock fell nearly 5% and today shares were down as much as 8% in morning trading.

Shares of the online real estate resource famous for its home price “Zestimates” are off more than 40% from their all-time highs less than a year ago.

What’s happening to Z stock? Can the slump be stopped? Perhaps, but that’s a tall order. You’d be better of dumping Z stock like a cheating ex-lover and forgetting it ever existed.

On to the next.

A Swirl of Controversy

Move Inc, a subsidiary of News Corp (NASDAQ:NWSA) and direct competitor to Zillow, allegedly filed a scandalous anonymously penned document in a trade secrets lawsuit against its rival last week. The unsigned letter, brought to light by GeekWire, apparently makes two claims that could make the Z stock price decline even further if they are eventually substantiated.

The first claim, while it paints Zillow in an unflattering light, isn’t all that damning: it claims a former Move Inc chairman went to work for Zillow when an injunction prevented him from legally doing so.

The second claim could be far more hurtful for Z stock if verified: it claims that another former Move executive left for Zillow, taking Move’s “private MLS contact database” and “listing count database” with him, according to the GeekWire report.

It’s too early in the process to separate the rumor from fact, but we’d be lying to ourselves if we said Wall Street doesn’t pay attention to potentially damaging chatter such as this. The simple fact is that these reports make investors perceive Zillow stock as a higher-risk play than they did previously, causing concerned investors to drive the Z stock price down.

While it would be a nightmare incarnate if these reports turned out to have merit, a real-life, verifiable nightmare manifested itself today in the form of horribly downbeat guidance.

For fiscal 2015, Zillow CEO Spencer Rascoff said he expects full-year revenue to come in around $690 million — a far cry from the $740 million analysts expected. As if that 7% haircut to revenue projections weren’t enough, Rascoff also lowered guidance for the company’s interest, taxes, depreciation and amortization, or EBITDA. Rascoff now sees Zillow’s EBITDA between $80 million and $85 million, or  about 55% to 58% of the previous $146.8 million consensus. Ouch.

Rascoff blamed much of the guidance disappointment on the fact that Zillow’s acquisition of rival Trulia was slow to gain FTC approval, but unfortunately pointing fingers doesn’t boost EBITDA.

With Z stock already trading at 36 times projected 2016 earnings, I get a feeling this frothy stock is only starting to feel the pain.

As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at [email protected]

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Article printed from InvestorPlace Media, https://investorplace.com/2015/04/dump-zillow-z-stock-before-bad-turns-to-worse/.

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