Is Zillow Group a Buy Under $60?

Digital real estate company Zillow Group, Inc. (Z), which is headquartered in Seattle, Wash., operates real estate brands on mobile applications and websites in the United States. It operates through three segments: Homes; Internet, Media & Technology; and Mortgages. Z's shares have declined 57.2% in price year-to-date and 41.7% over the past month to close yesterday's trading session at $54.26. The stock is currently trading well below its 50-day and 200-day moving averages, near its 52-week low.

The stock plunged 25% on November 3, after the company announced plans to exit the home-flipping business because of an inability to predict housing prices accurately. "We determined that further scaling up Zillow Offers is too risky, too volatile to our earnings and operations, too low of a return on equity opportunity, and too narrow in its ability to serve our customers," CEO Rich Barton said. Furthermore, supply chain bottlenecks and the high costs have chipped away Z's margins.

The company reported a $328.17 million third-quarter net loss, attributable mainly to its iBuying unit. The iBuying, or instant buying, unit allowed homeowners to sell their homes to Z for cash, eliminating the lengthy processes typically associated with such sales. The company further expects to incur losses of no more than $240 million, and $265 million in write-downs in the fourth quarter, tied to inventory it has already agreed to purchase. KeyBanc analyst Edward Yruma's research note states that two-thirds of the homes owned by Z are currently worth less than what the company paid for them.

Here is what could shape Z's performance in the near term:

Lower-Than-Industry Profit Margins

Z's 36.45% gross profit margin is 44.9% lower than the 66.19% industry average Also, its 0.97% EBITDA margin is 98.2% lower than the 54.80% industry average.

Furthermore, Z's negative 4.36% and 70.03% respective net income and levered FCF margins compare with the 14.48% and 37.40% industry averages.

Lawsuits

The Klein Law Firm reported that a class action complaint has been filed on behalf of shareholders of Z alleging that the company violated federal securities laws. The lawsuit alleges that Z failed to disclose that it was experiencing unpredictability in its Offers business, which subsequently adversely impacted its financial results. The lawsuit alleges that the defendants' positive statements about their business, operations, and prospects were materially misleading and lacked a reasonable basis. Several other law firms, including Levi & Korsinsky, LLP, The Gross Law Firm, Robbins LLP, and many others, are investigating the company. This could all negatively impact Z's share price.

Top Line Growth Does Not Translate into Bottom-Line Improvement

Z's total revenues increased 164.5% year-over-year to $1.74 billion in its fiscal third quarter, ended September 30. However, its total income before income taxes stood at negative $339.19 million, up 948.1% from the same period last year. Its net income declined 929.4% from its year-ago value to negative $328.17 million. The company's total adjusted EBITDA came in at a negative $168.74 million, indicating a 210.9% decline year-over-year. Z's EPS were negative $0.95 versus the consensus estimate of $0.15, reflecting a negative 733.3% earnings surprise.

POWR Ratings Reflect This Bleak Prospects

Z has an overall F rating, which translates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of F for Quality, which is consistent with its lower-than-industry profit margins.

Z has an F grade for Stability. Its 1.33 beta justifies this grade.

Of the 77 stocks in the F-rated Internet industry, Z is ranked #75.

Beyond what I have stated above, you can also view Z's grades for Sentiment, Growth, Momentum, and Value here.

View the top-rated stocks in the Internet industry here.

Bottom Line

Z had expected its instant-buying, or iBuying, segment to generate substantial returns for the company. However, its business did not support the company for long. The real estate giant has announced plans to shut down the iBuying business entirely. Z incurred significant losses in its most recent quarter leading to a negative EPS. In addition, analysts expect a further decline in EPS of 336.6% in the current quarter and 331.8% in the current year. Thus, considering its weak profitability and bleak analysts' expectations, we think the stock is best avoided now.

How Does Zillow Group, Inc. (Z) Stack Up Against its Peers?

While Z has an overall POWR Rating of F, one might want to consider investing in the following Internet stocks with an A (Strong Buy) rating: Travelzoo (TZOO) and Yelp Inc. (YELP).

Z shares were trading at $55.13 per share on Tuesday morning, up $0.87 (+1.60%). Year-to-date, Z has declined -57.53%, versus a 25.19% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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