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Zillow Group ZG recently announced its intention to raise funds through concurrent underwritten public offerings and convertible unsecured senior notes. In this regard, the company intends to offer concurrent public offering of $325 million of its Class C capital stock and $325 million in aggregate principal amount of its senior notes. The notes will mature in 2023.
The company will also provide a 30-day option to underwriters of “Shares Offering” and “Notes Offering” to purchase up to an additional $30 million of common stock and $48.75 million of senior notes, respectively. This additional amount is intended to cover over-allotments, if any. Consequently, Zillow Group will be raising $650 million in total with the shares and senior note offerings.
The company will disclose interest rate, conversion rate and other terms after determining the pricing of the offering. However, it has stated that the interest payment will be semi-annual. The offering is subject to customary closing conditions.
Citigroup Global Markets Inc. and Goldman Sachs & Co. LLC are acting as joint book-running managers for both the offerings. J.P. Morgan Securities LLC, Canaccord Genuity LLC along with a few other lenders are acting as co-managers for the Shares Offering.
Zillow Group intends to use the net proceeds from the aforementioned offerings to pay the cost of the capped call transactions. It also intends to utilize the remaining of the net proceeds for general corporate purposes, strategic acquisitions and working capital.
Stock Performance & Cash Position
Shares of Zillow Group have been steadily treading higher over the past year. The company’s stock has gained 27.4% year over year, substantially outperforming the 9.2% rally of the industry it belongs to.
We believe that the company has a strong balance sheet, which will help it in capitalizing on investment opportunities and pursuing strategic acquisitions, further improving growth prospects. Moreover, the senior notes offering will lower Zillow Group’s cost of capital, consequently strengthening balance sheet and supporting growth.
The company exhibited an impressive cash position in recently reported first-quarter of fiscal 2018. Cash and short-term investments were $822.9 million as of Mar 31, 2018, up from $762.5 million reported in the previous quarter. Moreover, the company generated $258.2 million of cash flow from operational activities in for fiscal 2017. The increasing liquidity and cash flow trend reflects that the company is making investments in the right direction.
Zillow Group is working toward growth of emerging marketplaces. With the combination of machine learning and personalization, the company anticipates to align consumer interest with the listed properties. Expanding footprint in new cities and cities where the company has a significant market presence, including the likes of Phoenix, Denver, Irvine, Cincinnati, Lincoln Nebraska, will positively impact the top line, going forward.
A new lead distribution and validation process is currently under testing aimed at improvising company’s Premier Agent business. Additionally, participating in the Zillow Instant Offers marketplace is aimed at capitalizing the business opportunities in the Home segment.
The company’s application that allows agents to create 3-D home tours, aiding buyers narrow down their searches before a personal visit, is another positive.
Nevertheless, stiff competition, increasing mortgage interest rates and higher advertising spend are major headwinds. Moreover, spending in product enhancements is likely to limit margin growth at least in the near term.
Zacks Rank and Key Picks
Zillow Group carries a Zacks Rank #4 (Sell).
Better-ranked stocks from the broader technology sector are NVIDIA Corporation NVDA, Micron Technology, Inc. MU and NetApp, Inc. NTAP, all carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
NVIDIA, Micron and NetApp have a long-term earnings growth rate of 10.25%, 8.18% and 13.34%, respectively.
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