Why Spruce Point warns Zillow has a 40-60% downside risk
According to Spruce Point, Zillow (Z, ZG) presents a 40 to 60 percent downside risk. The warning stems from the firm's belief that the company has little room left to grow, further noting lower web traffic and ongoing industry litigation.
Spruce Point Founder and CIO Ben Axler joins Yahoo Finance to discuss the warning from his firm and explain why analysts are having trouble trusting Zillow management's guidance.
Axler explains why the negative earnings aren't entirely priced into the share: "Zillow just put out their year-end earnings and updated their investor presentation, which they hadn't done in two years. If you look carefully, they retracted their 2025 revenue goals, and by that they implicitly guided down substantially their 2024 revenue. In addition, Zillow has been telling investors that they're gonna get the 45% EBITDA margins, they also said that was by 2025, if you look carefully they no longer have a time frame but yet are sticking to that 45% EBITDA margin target."
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Editor's note: This article was written by Nicholas Jacobino
Video Transcript
JOSH LIPTON: Our final call, Spruce Point warning of a 40% to 60% downside risk on Zillow. The online real estate company warning that the core business has matured and new growth is facing near and long-term headwinds.
Ben Axler is out with the new reports. He's the Spruce Point founder, CIO. He joins us. Now, Ben, it is good to see you. So you're betting against Zillow here. Ben, you see shares could fall maybe 40% even 60%. How come, Ben? Walk us through the argument, and why make this bet now, Ben?
BEN AXLER: So we love companies like Zillow. This is not a new story. This is a very mature tech company that's under fundamental pressures and regulatory and litigation risks. So let me explain. Fundamentally, there's a new entrant that has committed $1 billion to market against Zillow.
And that's Homes.com, which is owned by CoStar, a company three times the size. They rolled out a bunch of Super Bowl ads, you may have seen. That's not a company you want to bet against. Secondly, what we think people fail to understand is that Zillow's core customers are buy-side real estate agents. So they sell leads to these agents.
Now, there was a landmark lawsuit against the National Association of Realtors that lost a lawsuit, which effectively, we believe, is going to unbundle broker commissions between buyer brokers and seller brokers. What that means in practical terms is that, ultimately, we expect a lot of brokers to leave the industry, commissions to compress. And that the budgets and money available for Zillow's core customers to spend on Zillow is going to go down.
So, you know, we have these overarching issues against a company that has failed to hit its targets time and time again, that's overvalued, that has poor governance, and ultimately, we think 40% to 60% downside risk.
JOSH LIPTON: Ben, I am curious. Josh asked about the timing here. And the litigation stuff happened late last year. Homes.com has been deploying capital. And the stock went down quite a lot. So the bulls might argue, well, a lot of that negative news is priced into the shares here.
BEN AXLER: So let's tell you what's new. Zillow just put out their year-end earnings and updated their investor presentation, which they hadn't done in two years. And if you look carefully, they retracted their 2025 revenue goals. And by that, they implicitly guided down substantially their 2024 revenues.
In addition, Zillow has been telling investors that they're going to get the 45% EBITDA margins. They also said that was by 2025. If you look carefully, they no longer have a time frame, but yet are still sticking to this 45% EBITDA margin target and what's odd here is that if you look at the market estimates, the analysts, the majority that say buy, they're not even forecasting 25% EBITDA margin.
So there's a huge disconnect here that seemingly analysts don't even trust management's guidance, but yet the stock has upside to $60 per share. So the timing, if you ask us, is we look at a stock that was recently trading $57 and $58 a share with very limited upside and a lot of downside if our litigation thesis plays out and our competition thesis plays out.
