From here, it simply looks like Zillow Group, Inc. (NASDAQ:Z, NASDAQ:ZG) picked the wrong day to report earnings. Zillow stock is declining roughly 3% despite a strong Q4 earnings release on Thursday afternoon. Revenue growth came in moderately ahead of expectations, and 2018 guidance looks strong as well.
Indeed, in the market environment of just two weeks ago, there probably would have been enough here to move Z stock higher on the day. For a moment, Zillow stock was actually trading positive on Friday morning. But as yet another wave of selling hit the stock market, the gains reversed to losses.
Market movements aside, Zillow’s Q4 looks solid, if not spectacular. And the same is true of the valuation here. Zillow stock isn’t cheap, but given its growth, it’s not that expensive, particularly looking behind headline price-to-earnings ratios. Certainly, it’s a valuation Z stock can grow into — and if it continues to grow as it has in Q4, and expects to in 2018, there’s a clear path to $50 and beyond.
Zillow’s Q4 Earnings
Zillow’s fourth-quarter report truthfully doesn’t look like it changes the case here all that much — in either direction. Revenue grew a solid 24%, almost two points better than consensus. Adjusted earnings-per-share of $0.19 were in line with the Street.
2018 guidance was mixed. Revenue is guided above expectations, to $1.302-$1.317 billion against consensus of $1.292 billion. But Adjusted EBITDA guidance looks a little disappointing, coming at $300-$315 million versus estimates of $317 million.
But Zillow beat its original guidance handily this year, and overall the quarter has little in the way of major surprises. Operationally, the news does look good in terms of both full-year performance and forward-looking guidance. Marketplace revenue rose a nice 26%, with advertising revenue (now only ~8% of the total) declining modestly as Zillow lessens its focus on that stream. Visits rose 21%, better than the 14% gain cited at realtor.com.
Adjusted EBITDA margins soared; Zillow was barely profitable in 2016 (just $15 million in Adjusted EBITDA) but drove 22% margins in 2017. Guidance suggests further expansion to 23%+ in 2018.
From here, it looks like a good quarter, and at least one analyst agreed. Canaccord Genuity raised the price target on Z stock to $54, projecting an “exciting year ahead“. With revenue and profit guided to increase 20%+ in 2018, that sounds about right.
Buy Z Stock?
There’s a case that Z stock prices in that growth, particularly from a P/E standpoint. The stock trades at over 100x GAAP net income guidance of $38-$53 million, and roughly 50x non-GAAP consensus estimates.
But growing at 20%+ will bring those valuations in. And looking closer, other valuation metrics don’t seem nearly as stretched. Forward EV/revenue is in the 6.5x range — high, but in-line with other internet providers like Match Group Inc (NASDAQ:MTCH) and Wix.com Ltd (NASDAQ:WIX). EV/EBITDA, based on 2018 guidance, is about 28x. That’s also in-line with peers, and a multiple Zillow can grow into as operating leverage amplifies revenue growth going forward.
All told, I like Z at these levels. A further pullback would be nice, and isn’t impossible; at still-high valuations, Z stock easily could get dragged down further by market sentiment.
But even in the mid-40s, Zillow stock looks attractive. Growth continues to be solid, with Zillow improving both user growth and monetization. Competition against realtor.com, now owned by News Corp (NASDAQ:NWS, NASDAQ:NWSA), remains intense. But the market should continue to grow as online searches, and tools, become an increasingly bigger part of the homebuying experience.
Again, there are risks here. Broad market weakness is a concern in the near-term. As I pointed out last week in voicing concern toward Lowe’s Companies, Inc. (NYSE:LOW), the housing market isn’t as strong as some think it should be. Homebuilder stocks like NVR, Inc. (NYSE:NVR) and D. R. Horton Inc (NYSE:DHI) are down big to start the year, and real estate concerns could read across to Z as well.
So patience should be advised here, as a better entry point might come along. But from a long-term standpoint, Zillow stock still appears to have room to run.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.