If Zillow Group, Inc. (ZG, Z) were a house, it would have been a pretty good flip, returning about 25% this year and nearly 100% from its February lows.
A big part of the excitement came today after ZG effectively dealt with an uncertain legal liability concerning rival Move Inc. — which is owned by News Corp (NWS, NWSA) — regarding claims of misuse of trade secrets because of the hiring of a senior executive.
Move was seeking about $2 billion in damages but ultimately settled for only $130 million, and there was also no admission of liability, wrongdoing or responsibility. As a result, investors pumped up Z stock by about 6%.
It looks like Wall Street was betting on a settlement of about $500 million, prompting analysts at Barclays PLC (ADR) (BCS) to raise the price target from $20 to $32 on ZG stock:
“We were expecting either a negative judgment against Zillow or a settlement of at least $500 million, given an adverse inference instruction to the jury about evidence spoliation heading into the trial — so we view this outcome as highly favorable for ZG.”
But of course, there is much more than just this legal outcome. Another key factor for Zillow stock is the continued strength in the core business, as it looks like the transformative merger with Trulia is paying off.
In the latest quarter, revenues increased by 34% to $152.5 million and the adjusted net loss came to 13 cents a share (of course, a big drag was the continued costs from the lawsuit). And the momentum should continue: Zillow upped its annual guidance on revenues to $825 million to $835 million, up from the prior estimate of $805 million to $815 million.
A critical driver for all this, of course, has been its robust user growth. In March, the number of unique visitors jumped by 22% to 166 million.
Bottom Line on Zillow Stock
Over the years, Zillow has built a solid platform, catering not just to real estate but also mortgage finance and rentals. The company has also created an extensive offering of premium tools for real estate professionals.
Yet, investors may still want to be cautious on Zillow stock. Let’s face it, the valuation is getting a bit lofty. After all, the forward price-earnings multiple is at a steep 63. By comparison, Facebook Inc (FB) sports a multiple of 26 — and is growing much faster! But Zillow stock is also selling at double the multiples of other dot-coms like Twitter Inc (TWTR) and LinkedIn Corp (LNKD).
The recent run-up in ZG stock is also likely attributed to the high levels of short interest, at about 19% of the float (this wager probably had a lot to do about the expectation of a negative outcome for the lawsuit). At such levels, there is often forced buying as short sellers need to cover their positions. But this source of demand will only be temporary.
Besides, there are ominous signs that the U.S. economy could be entering a recession, especially in light of the softness in employment (only 38,000 new jobs in the latest monthly report). There is also the wildcard of the upcoming presidential election. Interestingly enough, economists at firms like BCS, JPMorgan Chase & Co. (JPM) and Deutsche Bank AG (USA) (DB) have recently increased the chances of a recession.
In other words, if there is a downturn, the real estate market will inevitably feel the pain as consumers will hold off on making major financial decisions. And given that the valuation on Zillow stock is already trading at premium levels, there could be lots of risk for investors.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.