Zillow Group Inc Class C (NASDAQ:Z) has impressed investors with the monetization of its real estate data and its standing within its niche. Unfortunately, current valuations leave Zillow stock with little room to move upward.
The zillow.com website and those of its network allow customers to find homes, agents, rentals, and mortgage brokers all in one place. The power of this resource and a booming real estate market have led to tremendous growth. Its profits and stock price have grown with it.
Zillow has done a great job in monetizing its assets. The company positioned itself firmly in the real estate market with its purchase of Trulia in 2015. Now its only real competition is realtor.com, which is owned by News Corp (NYSE:NWS). The site serves as the official site for the National Association of Realtors.
Zillow Stock Upsides
Still, Zillow has succeeded where many have failed. They have mastered the art of monetizing a treasure trove of real estate data. Zillow sources of revenue include ads for listings and ad sales to other business, primarily mortgage lenders.
However, Premier Agent listings account for the majority of Zillow’s revenue. Investors also need to know that Zillow stock prices are not tied to the website alone. Its network includes sites such as Trulia, Yahoo! Inc., HGTV’s Front Door, and MSN Real Estate from Microsoft Corporation (NASDAQ:MSFT).
Since it has a formidable competitor in realtor.com, I’m not going to call Zillow stock the Facebook Inc (NASDAQ:FB) or the Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) of real estate data. Although, Zillow does more closely resembles Facebook or Alphabet in its niche than does realtor.com.
A booming real estate market gives Zillow stock further power in the market. With strong economic growth and tight inventories in many urban markets, prices have risen.
Price Trends and Valuation on Zillow stock
Z stock has become a direct beneficiary of this boom. Between late February and mid-March, the stock increased in value by over 28%. It hit its 52-week high of $59.99 per share on March 15. Since then, the stock has shed about 12% of its value. This has proven to become a typical pattern for the stock since it launched its IPO in August 2015.
It runs up over a short period, gives some of that gain back, and then moves sideways for the next few months. If I have to make Zillow stock predictions for the near term, I expect to see little movement from Zillow stock for the next few months.
Also, valuations indicate Z stock has moved ahead of itself. Since the company earned 53 cents per share in 2017, that places the current price-to-earnings ratio at about 100.
However, if the consensus 2018 net income estimate of 86 cents per share holds, that brings the forward PE to 62.
The problem with Z stock is I don’t see a compelling case to buy. Assuming the real estate market continues to boom, I would consider the stock fairly valued to slightly high at its current price. However, if home sales were to turn downward, ads and Premier Agent revenue would likely take a hit. Zillow stock would likely fall with it. With its profit growth and a booming real estate market, I’m not inclined to sell. However, I do not see this stock moving up for a while either.
The Bottom Line on Zillow Stock
Although Zillow enjoys substantial revenue and earnings growth, valuations and its stock history indicate its benefits are fully priced into Z stock. Zillow has strung together a network of websites, data, and agents that have made it a valuable source of real estate information. The company has also monetized this network successfully by deriving income from agent listings in ads.
Unfortunately for stock investors, the current PE stands at 100. Moreover, with a history of stock price growth pausing after large increases, Z stock is unlikely to move higher in the near term. I see Zillow stock performing well in the future. However, investors should hold out for a better valuation, or at least for signs that the next move higher has begun.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.