Zillow Stock's Bull Case: Why This Recent Sell-Off Could Be a Buy

Shares of real estate stocks seem to be on thin ice right now, but there are signs of a potential recovery coming first to those at the top of the value chain. While real estate investment trusts (REITs) see their prices underperform the S&P 500, investors will be surprised to see that they will be among the last to see a recovery.

This is because the real estate services names could be first in line to see profit runs and higher valuations, and this is where stocks like Zillow Group Inc. Z come into play for investors to consider moving forward. It may not be as discounted as some of the REITs to offer investors an opportunity to buy a dip today. Still, its recent decline to 87% of its 52-week high can definitely pose a potential new run higher as long as the right tailwinds play out.

Before investors get into the weeds of why real estate services stocks like Zillow are attractive today, they should first check in with Wall Street analysts for their opinions on the stock and some institutional investors to see what is actually happening in the back end to drive the stock to a new high before 2024 is over.

Wall Street Remains Bullish on Zillow Stock Despite Recent Sell-Off

Typically, Wall Street analysts will change their views on a stock after bearish price action, so the fact that they are still bullish for Zillow today means even more for investors. Those at Jefferies Financial Group recently reiterated their Buy rating for Zillow stock. Still, their price targets were the main event for investors.

By raising their valuations from $80 a share to $90 a share for Zillow, these analysts are directly calling for a net upside potential of as much as 51.4% from where the stock trades today, not to mention a new high for the year. More than that, a few institutional buyers also made their bullish views public recently.

Allocators from International Assets Investment Management decided to raise their stakes in Zillow stock to as big as $15.7 million today, giving investors a new indicator to justify a buy ahead of potential tailwinds. Even bearish traders decided to ditch their positions on Zillow stock over the past month, showing signs of capitulation.

Zillow stock’s short interest declined by as much as 3.8% during the past month despite the sell-off in the stock, which – all else being equal – should have actually attracted more short sellers to ride on the bearish momentum. Given that this wasn’t the case, investors can see the bullish evidence stacking up in favor of Zillow stock.

Key Fundamental Tailwinds Boosting Zillow Stock's Bullish Potential

It all starts with the ISM services PMI index, which shows the real estate leasing and services sector as one of the few that still manages to push expansion readings while most are falling into contraction territory. Now, services and leasing mean rentals and transaction services, where Zillow holds most of the market share today.

Seeing the recent boost in pending home sales, investors can see that Zillow now holds 50% more listings on its platform compared to last year. That means 50% more opportunities to generate revenue from fees and advertising services. Management knows this, so they’ve started pivoting the business accordingly ahead of time.

According to the company’s latest quarterly earnings press release, revenues as a whole rose by 13% over the past 12 months. However, most of this growth was driven by rentals, which outpaced residential revenue by 29% compared to only 8% during the year.

That would make sense, as investors can see mortgage rates rise right now, and the mortgage market index sits at lows not seen since 1996. Not surprisingly, shares of mortgage originator Rocket Companies Inc. RKT are now down to 77% of their 52-week high prices, signaling weaknesses in the mortgage market.

Still, people need a place to live, and if it isn’t by buying, then it’ll be through renting. That’s why Zillow has invested a lot more capital and energy into that segment to anticipate the coming market shift. So far, these efforts seem to be paying off, considering the double-digit runs Wall Street expects to see from this stock.

One last check is found in Zillow stock’s valuation multiples compared to the rest of the peer group. On a price-to-book (P/B) basis, Zillow trades at only 3.1x today, coming well below the business services industry’s average valuation of 5.6x. This discount offers enough to close the gap between today’s sell-off and Wall Street analyst targets.

Maybe some of this recent bullishness comes ahead of the company’s earnings announcement, where the stock might deliver a surprising set of results backing these bullish theses into reality.

The article "Zillow Stock's Bull Case: Why This Recent Sell-Off Could Be a Buy" first appeared on MarketBeat.