Zillow's Risk-Reward Is Too Good To Pass Up, Analyst Says

Shares of real estate database company Zillow Group, Inc. ZG have underperformed since KeyBanc Capital Markets' July initiation, indicating tempered optimism on market-based pricing tailwinds, the firm said.

The Analyst

KeyBanc analyst Brad Erickson upgraded shares of Zillow Group from Sector Weight to Overweight with a $54 price target. The upgrade is based on expectations the shares have renewed upside potential in 2018 if agent churn moderates. 

The Thesis

As low housing inventory persists, transactions and customers are tougher to come by, Erickson said in a Thursday note. (See the analyst's track record here.) 

This creates a tailwind for real estate agent spending on lead generation, the analyst said. 

KeyBanc's channel checks show that the perception of a lack of a viable competing alternative to Zillow has tempered the churn rate, Erickson said. The analyst said he is comfortable with his estimates for the company.

"We are adjusting our 2018 quarterly estimates slightly as a function of faster lead growth, fully offset by more appropriate and slower revenue per lead growth." 

CFPB overhang remains a risk, "but we'd 'play through it,'" Erickson said. 

Citing expectations for slowing lead growth and less pricing uplift year-over-year from market-based pricing, KeyBanc expects an ongoing deceleration in the Premier Agent ad business from 29 percent in 2017 to 24 percent in 2018 and 21 percent in 2019.

The firm now estimates EBITDA growth of 34 percent on a CAGR basis from 2017-2019.

The Price Action

Zillow Group shares are up about 22 percent over the past year.

Shares were up 1.88 percent after the open Friday at $45.03. 

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Photo courtesy of Zillow.