Zillow Group Inc (NASDAQ:ZG) beat estimates in its first-quarter earnings report. The online real estate company has stagnated recently amidst a longer-term growth pattern. Considering the growth ZG stock has enjoyed, some might initially interpret this pause in the stock price as a buying opportunity. However, with high valuations and possible variations in the economic cycle, investors would likely find higher returns in other investments.
ZG Stock Beat Estimates
Q1 Zillow earnings per share (EPS) for ZG came in at 7 cents. Analysts had been looking for 6 cents per share, although the company had earned 11 cents per share in the same quarter last year.
The company also brought in $299.9 million in revenue. This represents an increase in 22% from the same quarter last year. Analysts had expected consensus revenues of $299.2 million. Three of the four company segments saw significant increases. Its Rental and Other divisions both increased revenues by over 30%. Premier Agent listings, which accounted for just over 70% of the company’s revenue, rose by 22% year-over-year. However, revenue from its Mortgage division came in at $19 million, a 6% decline from last year’s levels.
Attributes Priced Into ZG Stock
In a recent article on Zillow Group Inc Class C (NASDAQ:Z) (Zillow’s non-voting shares), I argued that valuations and the history of the stock indicated that the equity’s benefits had been priced into the stock.
Some analysts may agree. Morgan Stanley also cut its rating recently. Moving the stock to an equal-weight, the target price was cut from $55 to $50 per share. An interesting call since the post-earnings movement in the stock appears to be moving toward the new $50 price target.
Regarding trading patterns, I also observed that the stock tends to run up, give part of that gain back, and then flatten for a time. Since peaking at just under $60 on March 15th, the stock has been falling.
And the market doesn’t seem to know how it feels about ZG’s earnings. The stock initially popped after earnings, only to fall to 8% below pre-earnings levels. In this morning’s trading it surged nearly 7%, only to fall and then pop again. As of this writing, ZG is up less than 1% from yesterday’s close.
ZG Stock Trades in a Dangerous Position
Valuations appear to vindicate a downward trend. Even after the downward move, the stock trades at almost 80 times earnings. The average price-to-earnings-to-growth (PEG) ratio for the S&P 500 is 1.33. Analysts expect annual profit growth will average about 45%. This would indicate the stock should trade no higher than a 60 price-to-earnings (PE) ratio. The stock would have to fall about 25% to reach this goal.
Zillow has made impressive use of its real estate data. It has acquired several websites and relegated realtor.com, the National Association of Realtors page, owned by News Corp (NYSE:NWS) to second place in terms of importance.
Still, the stock remains in a dangerous position. The country has reached a mid-to-late stage in the economic cycle. Should the economic turn, much of that lucrative Premier Agent revenue could dry up. When that occurs, the downdraft will likely become more than a minor correction after a run-up. I expect Zillow’s profit growth to continue as long as the economy remains robust.
However, I think now is a risky time to take a position in this stock.
The Bottom Line on ZG Stock
Valuations and dependence on Premier Agent income place ZG stock in a dangerous position. Zillow has accomplished the impressive feat of becoming the premier real-estate site. And its other sites will likely continue and strengthen the company’s dominance in online real-estate listing for the foreseeable future.
However, all of the attributes of this stock have already been priced into the equity.
Also, Zillow stock has gained a dangerously high level of dependence on Premier Agent revenues. Premier Agent revenues have grown high on a tight real estate demand in many major metro areas. Should that change, Zillow’s revenue would take a hard hit, and EPS would likely turn negative.
When one combines that vulnerability with Zillow’s high multiple, the stock looks dangerous here. Although I remain bullish on the future of ZG stock, I feel investors should look for gains in other equities.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
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