Analysts expect this real estate marketing company to grow at a rate of more than 58% this year and 45% in 2019. Two companies have recently upgraded the shares: KeyBanc and Morgan Stanley, both to ‘Overweight’.
Zillow (ZG)
From Canaccord Genuity Research
This was in our opinion the most interesting Zillow (ZG) call since the Trulia acquisition was announced. In addition to reporting solid Q4 results and providing very solid (low-20% revenue growth) and typical (flattish EBITDA margin) 2018 guidance, management laid out new strategic priorities that shift focus from lead generation to lower-funnel transaction activity, including: 1) growing the portfolio of brands, and new brands, with the possibility of international expansion; and 2) a renewed focus on “following consumers down the funnel” and “aligning revenue more closely with our partners.”
These results strongly reinforce our view that Zillow is still in the early stages of growing into a much larger company. While the premium valuation will likely continue to make the stock more volatile than the business, we would continue to look for entry points to increase exposure over the long term.
Bullish: User growth accelerated modestly; visit growth accelerated modestly; total revenue beat consensus; 2018 revenue guidance exceeded expectations.
Bearish: PA rev/visit grew <1%; 2018 EBITDA guidance was below expectations.
Key points:
- New strategic priorities for 2018. Management outlined four refreshed priorities: 1) Grow audience and pursue new brands & geographies; 2) Better experiences for consumers and industry partners; 3) Revenue model better aligned with transactions & commissions; 4) Attract the best talent. Management affirmed that new geographies include the distinct possibility of international expansion, and discussion around revenue model alignment should open up commission-related revenue.
- Premier Agent (PA) revenue growth remains strong, but auction pricing still ramping. PA revenue came in at the low end of guidance, but still grew a healthy 21%. The segment continues to be driven mostly by audience and engagement growth, as pricing improvements require greater adoption and auction density. Unique users grew 8.2% y/y, a slight acceleration from 6.5%, and visits grew 21% y/y, from 19%. However, PA rev/visit growth slowed considerably to <1%, showing the impacts of seasonality. We think traffic and engagement growth may have more room than originally expected as the company advertises more fully its entire portfolio of brands.
- Guidance is solid but leaves room for upside. Revenue guidance was in line with consensus, while EBITDA guidance was (characteristically) below. Two major areas of investment are brand spend and innovative new products. The company opportunistically spent more on brand advertising in Q4 and plans to again grow it at a rapid clip (in line with revenue growth, ~22%) in 2018. ZG also plans on spending $50M more than 2017 on innovations like Instant Offers, Concierge, 3D Homes, rental products, PA app enhancements, tech, infrastructure, data, and more.
We are making several changes to our model. Our price target goes to $54 (from $53), based on 45x (unchanged) our 2021 EPS estimate of $1.88, discounted at 12%.
Michael Graham, Austin Moldow, and Scott Suh, Canaccord Genuity Research, www.canaccordgenuity.com, February 9, 2018