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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