Why Zillow Stock Is Down 20% In 2021 In The Middle Of A Housing Boom

Historically low interest rates have created a boom in the U.S. housing market in 2021. Unfortunately, shares of real estate sales platform Zillow Group Inc Z are down 22.4% year-to-date, a frustrating trend for Zillow investors.

A Wealth of Common Sense's Ben Carlson recently took a deeper look at what is going on with Zillow’s stock, which may seem puzzling at first glance.

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Zillow’s Underperformance: Zillow’s underperformance is even more curious compared to the gains in Lennar Corporation LEN, Invitation Homes Inc INVH, Toll Brothers Inc TOL and other housing stocks this year. Each of those three stocks are up more than 30% year-to-date.

Earlier this year, existing home sales hit their highest levels since the housing bubble of 2007. Zillow reported 70.4% revenue growth and 111.4% net income growth in the most recent quarter, so the housing boom is certainly having an impact on Zillow’s business.

When a company like Zillow is performing so well in such a hot market and the stock is lagging, Calrson said the next place investors should always look is the stock’s valuation. The stock market is forward-looking, meaning the boom in the housing market may have already been priced into Zillow’s share price long ago. At the same time, investors may already be discounting Zillow’s recent performance because the market is already pricing in an inevitable future decline in housing sales.

Look To The Valuation: Carlson took a look at Zillow’s historical price-to-sales ratio, which seems to explain some of the problem. Despite the recent boom in Zillow’s sales, its 7.6 PS ratio is still currently above its five-year average of 6.8.

It appears the stock already priced in the last year's housing market boom. In fact, Zillow’s share price was up 182% in 2020, a move that sent its PS ratio up above 13 in early 2021, more than double its long-term average.

While low interest rates typically do lead to higher broad market valuations, Carlson said a 13x PS ratio is a bit tough for investors to swallow even during a housing market boom.

“Maybe this was a case where investors got overly excited and ran the price well beyond the zone of rationality,” Carlson said.

Plenty of other stocks that have skyrocketed from their March 2020 lows only to underperform in 2021, he said. It doesn’t necessarily mean there is something wrong with the stock or the underlying company. It may simply be a case of reversion to the stock’s longer-term historical valuation.

Benzinga’s Take: Stock price, earnings, revenue and other quantifiable fundamental metrics grow over time and can continue growing indefinitely. However, valuation ratios, such as earnings and sales ratios, should theoretically remain relatively stable over time, even as a company’s business grows.

Photo: the Zillow platform.