Short Seller Spruce Point Takes Aim At Zillow, Sees 40%-60% Downside In Stock

Zillow Group Inc Z ZG shares are facing selling pressure Tuesday after short seller Spruce Point Capital Management issued a bearish report on the real-estate platform company.

Zillow’s Sinking Foundation: Spruce Point sees 40% to 60% long-term downside in Zillow shares as the short seller believes the company’s Premier Agent program, which represented 62% of Zillow’s 2023 revenue, is facing a crisis.

Benzinga has reached out to Zillow for comment on the short report, but has not yet received a response.

Zillow generates a majority of its revenue by monetizing web traffic through advertising products or leads sold to real estate agents, but web traffic has been in decline for about a year “as record high home prices combined with elevated interest rates have dampened home-buying demand,” the short seller said.

Spruce Point also claims that litigation involving the National Association of Realtors could upend broker cooperation, which involves sharing commissions between listing agents and buying agents. The short seller highlighted an independent analysis showing that if broker cooperation were eliminated, up to 80% of real estate agents could abandon the industry, which would significantly reduce commission pools.

“Considering that buyer real estate agents are the core customers in the Premier Agent program, we believe this change could dramatically impact the Company’s results,” Spruce Point said.

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The short seller also argued that Zillow is facing competition for the first time after CoStar Group CSGP recently announced plans to invest over $1 billion to market Homes.com, which it acquired in 2021. Spruce Point believes Homes.com could negatively impact Zillow’s web traffic and take share from the company.

Spruce Point even claims that Zillow is using “various aggressive accounting and financial policies that can enable premature revenue recognition and margin enhancement.”

The short seller believes Zillow’s management team uses stock-based compensation to make margins and cash flows look more attractive and estimated pull-through rates to estimate higher revenues.

“We are concerned that Zillow may be inflating its revenue with unrealistic assumptions, which could have the effect of masking deteriorating fundamentals in its business,” Spruce Point said.

The short seller believes Zillow shares will settle between $23 and $35 over the long term.

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Z Price Action: Zillow shares close 4.9% lower on Tuesday at $54.49, according to Benzinga Pro.

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