Morgan Stanley: Zillow Offers Attractive Entry Point For A High-Quality Asset

By some valuation metrics, Zillow Group, Inc. Z's stock had a poor performance in 2017 — but Wall Street's newest bull analyst is convinced 2018 will be rosier. 

The Analyst

Morgan Stanley's Jonathan Lanterman upgraded Zillow's stock rating from Equal-weight to Overweight with a price target boosted from $38 to $50.

The Thesis

Zillow's stock gained 12 percent in 2017 and managed to grow its EBITDA by around 65 percent over the year, Lanterman said in the upgrade note. The stock underperformed small- and mid-cap stocks under the analyst's coverage and is now trading at a 25x multiple on 2018 estimated EBITDA, which represents a 16-percent discount to the stock's two-year average of 20x.

But the discounted price creates an "attractive entry point for a high-quality asset," the analyst said. Zillow is in a position to grow its revenue by 19 percent over the next five years and EBITDA by 35 percent over the same time period, Lanterman said.

The new bullish stance stems from new StreetEasy Rentals revenue, which has a pathway to $300 million of high-margin revenue over time, the analyst said. Zillow could even increase its StreetEasy Rentals pricing by a factor of 13 over the next eight years — from its current $3 a day to $40 a day per listing — while still giving agents and brokers the opportunity to realize a high ROI on their end, Lanterman said. 

While Zillow still holds some risks, such as the potential settlement with the CFPB, the stock is attractively valued with more positives than negatives, according to Morgan Stanley. 

Price Action

Shares of Zillow were trading higher by more than 4 percent at $44.26 at the time of publication. 

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Photo courtesy of Zillow.