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Zillow Group Prices Class C Shares & Notes Public Offering

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Zillow Group ZG recently announced the pricing of its concurrent underwritten public offerings of approximately 5.702 million shares of Class C capital stock at $57 per share. The company also priced its $325 million in aggregate principal amount of its convertible senior notes due in 2023. The notes carry an interest rate of 1.5%, payable semi-annually.

Details of the Offer

The company will also provide a 30-day option to underwriters of “Shares Offering” and “Notes Offering” to purchase up to an additional 855,263 Sharesand $48.75 million of senior notes, respectively. The offering, subject to customary closing conditions, is expected to close on Jul 3, 2018.

Zillow Group expects the proceeds from Shares Offering to be approximately $313.3 million or $360.3 million if the underwriters exercise in full their option to purchase additional notes. Further, the company anticipates net proceeds from the Notes Offering to be approximately $316.5 million. In case the underwriters exercise their option to buy additional shares in full, Zillow Group expects to raise $364 million. These funds are expected after accounting for underwriting discounts and commissions, and other projected offering expenses.

The company plans to utilize roughly $25.6 million of the net proceeds from Notes Offering 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.

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, CanaccordGenuity LLC along with a few other lenders are acting as co-managers for the Shares Offering.

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.

We believe that the company has a strong balance sheet, which will help it to capitalize on investment opportunities and pursue strategic acquisitions, further improving growth prospects. Moreover, we believe that the senior notes offering will bring down the company’s cost of capital, consequently strengthening its balance sheet and supporting growth.

Stock Performance

Shares of Zillow Group have been steadily treading higher over the past year. Its stock has gained 22.9% year over year, substantially outperforming the 9.6% rally of the industry it belongs to.

Bottom Line

Zillow Group is one of the leading operators in real estate and home-related information marketplaces. The company is working toward growth of emerging marketplaces. 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.

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 10.3%, 8.2% and 13.8%, respectively.

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