Morgan Stanley's New Valuation Of Zillow Prompts Downgrade

Zillow Group Inc Z ZG's new home buying and selling business deserves credit, but should be viewed as a lower quality and riskier business on a valuation basis, according to Morgan Stanley.

The Analyst

Morgan Stanley's Jonathan Lanterman downgraded Zillow Group from Overweight to Equal-weight with a price target lowered from $55 to $50.

The Thesis

Lanterman's new $50 price target is based on a sum-of-the-parts model that values Zillow's core business, advertising-based internet media business and tech business at $47 and the new home-flipping business at $3 per share, the analyst said in the downgrade note.

The home-flipping business comes with multiple "unanswered questions" that could impact current expectations, Lanterman said:

• Will Zillow be the first party for home flips or merely act as a market maker with a smaller cut?
• How quickly can Zillow expand to new markets and at what cost?
• What impact will the new business have with agents on the platform?
• What are the benefits for Zillow's core premier agent revenue?

A more bullish stance on Zillow's stock could be established if the following occurred, the analyst said:

• Evidence that lead conversion is resulting in sustainable pricing power.
• Zillow's home-flipping business shows potential for real earnings.
• Srong rentals revenue growth and a corresponding margin expansion.
• A successful launch in at least one international country.

Price Action

Shares of Zillow Group were trading lower by 1.64 percent at the time of publication Wednesday morning. 

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