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Zillow Stock Is a Buy Despite Lousy Response to Earnings

The Zillow earnings report for Q2 was encouraging, even if traders don't realize it yet

Don’t look now, but real estate website listing company Zillow Group (Z) may finally be reaching permanent viability, if yesterday evening’s earnings numbers — and despite today’s slight drop from Zillow stock — are any indication. An impressive earnings beat for the company’s second fiscal quarter of 2015 has turned the heads of investors who had otherwise given up on the company following the 40% slide Z shares have made over the past five months.

Zillow stock earningsWas it just a fluke, or can owners of Zillow stock actually breathe easier now that the recent merger with former competitor Trulia seems to be paying off?

Zillow Earnings

The numbers are impressive, to say the least. Revenue of $171.3 million was up 117% on a year-over-year basis, but even stripping out the revenue Trulia brought to the table, the company’s top line grew 20% compared to the second quarter of 2014. Either way, the pros were only expecting Q2 revenue of $168.69 million

The really impressive part of the Zillow earnings report, however, was income.

Analysts were calling for a second-quarter loss of 26 cents per share of Zillow stock, but all said and done, the company posted an operational loss of only one cent per share.

Though EBITDA isn’t a figure commonly forecasted by analysts, Zillow set its own bar on that front, too, only to leap well past it. The company posted EBITDA of $21 million, exceeding its own Q2 EBITDA target by $17 million. CEO Spencer Rascoff explained in not-much detail, “Zillow Group had a strong second quarter, beating our own expectations for revenue and EBITDA. We’ve been very focused operationally on the integration of Trulia, and made great progress on a number of fronts.”

He may have downplayed just how well the integration of the two companies is going.

The Union With Trulia Is Working

When the pairing of Trulia and Zillow was first announced, investors in suitor Zillow were less than pleased. The value of Zillow stock peaked at $164.90 that day, and Z shares have yet to fight their way back to anywhere near that price. Even with today’s advance, the current price of $74.85 suggests doubts have abounded since the idea was unveiled.

But, in light of the Zillow earnings news posted yesterday evening, the integration not only seems to be going well, but paying off … and doing so sooner than expected. Rascoff stated on the matter:

“As with most mergers of any scale, it has required a great deal of time, attention and energy. We’re pleased to share today that we will have successfully combined all advertising products by the end of the third quarter, well ahead of the timetable we shared on our May 12th conference call. Most importantly, we believe the strategic rationale for the combination remains extremely strong, as we are already realizing benefits of our combined audience scale.”

The initial benefit of the pairing had, at one time, been pegged at a cost-savings of $100 million, even though the two organizations would continue to operate independently of one another from a consumer’s perspective.

Now, that forecasted figure of $100 million in savings seems plenty plausible.

Bottom Line for Zillow Stock

To own, or not to own Z shares… that is the question.

It’s still a work in progress, but now with more scale and a little more experience. In an arena that’s still relatively immature and, until now, hasn’t had a decided leader, investors could do worse than owning Zillow. In fact, in light of the stock’s persistent weakness against a backdrop of encouraging guidance, the value of Zillow stock might be poised to stage an unexpected recovery effort.

The company offered disappointing guidance for the current quarter, as management expects revenue of $175 million-$177 million. The pros were expecting an average of $180.9 million. But, with as much rapid progress as the combined companies are now making, Zillow may have just set itself up for a nice beat three months from now. Similarly, the expected swing to a nice profit next year isn’t just wishful thinking.

Even at a forward-looking P/E of 49.2, the company’s trajectory should ultimately supersede any valuation concerns.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/zillow-stock-buy-despite-lousy-response-earnings/.

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