Should You Buy the Dip in Zillow?

operates real estate brands on mobile applications and websites in the United States. The company offers selling, buying, renting, or financing with transparency and a nearly seamless end-to-end service. Its portfolio includes Zillow, Zillow Offers, Zillow Closing Services, Zillow Home Loans, Trulia, StreetEasy, and HotPads. The stock has declined 16.7% in price over the past three months and 2.4% over the past month.

Last week, the company declared the suspension of its home-buying operation for the rest of 2021, which caused some analysts concern that Z has too many properties in its inventory, signifying a decline in demand. This caused the stock to decline 10% in price last week.

Furthermore, closing the last trading session at $92.21, Z is trading 55.7% below its 52-week high of $208.11, which it hit on February 16, 2021, signaling a downtrend. In addition, Z’s weak profitability and premium valuation could make matters worse.

Here’s what could influence Z’s performance in the upcoming months:

Business Headwinds

Last week, Z announced that it would not engage in any new contracts to buy homes through the end of 2021, potentially surrendering ground to rival iBuying businesses. The company is facing a large backlog of pending property transactions due to ongoing labor shortages. Moreover, variable material costs are hindering repairs and upgrades of purchased houses.

In addition, according to the U.S. Census Bureau, new house construction and building permit authorization declined in September versus the previous month due to a persistent labor shortage and supply constraints.

Weak Profitability

Z’s 8.2% trailing-12-month EBITDA margin is 25.3% lower than the 11% industry average. Furthermore, Z’s 3.7% trailing-12-month net income margin is 39.4% lower than the 6.1% industry average. Also, the company’s cash from operations stood at a negative $425.92 million.

Stretched Valuation

In terms of trailing-12-months EV/Sales, Z is currently trading at 3.30x, which is 26.8% higher than the 2.60x industry average. In addition, its 3.61x trailing-12-months Price/Sales is 109.5% higher than the 1.72x industry average. Furthermore, the stock’s 87.82x trailing-12-months non-GAAP P/E ratio is 345.3% higher than the 19.72x industry average.

Unfavorable POWR Ratings

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

Our proprietary rating system also evaluates each stock based on eight distinct categories. Z has a D grade for Stability and Quality. The stock’s 1.29 beta is in sync with the Stability grade. In addition, its lower-than-industry profit margins are consistent with the Quality grade.

Of the 78 stocks in the F-rated Internet industry, Z is ranked #62.

Beyond what I’ve stated above, we have rated Z for Growth, Sentiment, Momentum, and Value. Get all Z ratings here.

Bottom Line

Z’ shares have declined 29% in price so far this year. With the current labor crunch and supply bottlenecks, the company is facing operational difficulties. This is projected to persist for the rest of the year. In addition, its lower-than-industry profitability and lofty valuation could further amplify its poor price performance. Thus, 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 D, one  might want to consider looking at its industry peers, Alphabet Inc. (GOOGL) and Yelp Inc. (YELP), and Cars.com Inc.(CARS), which have B (Buy) ratings.

Z shares were trading at $93.01 per share on Monday morning, up $0.80 (+0.87%). Year-to-date, Z has declined -28.34%, versus a 22.44% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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