Zillow Group, Inc. (ZG, Z) has blown away the broader market so far this year, booking year-to-date gains of a sizzling 38%. Most recently, Zillow stock took off as investors applauded a lawsuit settlement with ZG’s rival Move Inc and the National Association of Realtors.
The lawsuit was over misappropriation of trade secrets, among other claims, and was settled the day it was supposed to go to trial after two years of legal combat.
The settlement tallied $130 million, while Move had been seeking roughly $2 billion in damages — that difference explains why investors were so excited.
Analysts liked the news too. For the cherry on top, analysts at Barclays upgraded Zillow stock. But with all this upward momentum, the question is whether ZG can keep this run up.
Can Zillow Stock Keep This Pace?
To answer that, let’s first zoom out a bit. Zillow stock went public in July 2011 at $20 per share. On the first day, the stock shot up to $44 per share before closing a bit lower at just under $36, which represented just shy of 80% gains in one day.
That reaction shows just how hyped ZG is. But unfortunately, as the run has continued, shares seem to have gotten ahead of themselves.
Let’s dissect this analyst upgrade, for starters. Barclays merely upgraded Zillow stock from “underweight” to “equal weight.” That’s not even a buy recommendation! And while the price target was jacked up from $20 to $32, ZG has already stormed through that, closing yesterday at $32.50.
These kinds of upgrades are sneaky, as they’re not nearly as bullish as headlines make them seem. Meanwhile, Z stock is crazy frothy. At the moment, shares are trading for 63 times forward earnings, 8 times sales and more than double book value. Take a minute and let those multiples sink it.
To say future growth is already priced in is quite the understatement — especially considering last quarter, the company posted a loss and the current quarter will also end in the red.
Compare the current share price to the current year’s expected earnings, and the price-to-earnings ratio is a whopping 361. It’s only after the crazy estimated 466% year-over-year growth is factored in that the ratio is whittled down to 64.
As a result, the slightest whiff of a slowdown is going to send Zillow stock sliding dramatically. And a slowdown is hardly out of the question, considering the company posted a larger-than-expected loss last quarter and doesn’t have much of a track record since it hit the public markets so recently.
While there’s a lot to like about ZG’s market share and business, it’s not enough to offset how overextended the stock has become. It’s prudent to take a pass at these levels, because Zillow needs to — and eventually will — take a breather.
While the lower-than-expected lawsuit settlement is promising, it’s not enough to justify the recent run-up and current expensive price tag.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
