Zillow Stock Down 7% Today – Time to Buy Z Stock?

The price of Zillow stock is dropping 7% today in pre-market stock trading action following news that the company is halting its house flipping operations due to a congested pipeline of projects.

In a statement e-mailed to Bloomberg, the company said: “We are beyond operational capacity in our Zillow Offers business and are not taking on additional contracts to purchase homes at this time,” said a company spokesperson to Bloomberg in an emailed statement”.

The program, which has become an important revenue segment for the real estate tech business, produced revenues of $1.71 billion in 2020 and accounted for 58% of Zillow’s top-line results during the first semester of 2021.

According to the firm’s estimates, the Homes segment should generate earnings before interest and taxes of 4% to 5% once it scales up.

Can this development affect the ability of Zillow stock to recover from its latest downtrend? In the following article, I’ll be assessing the price action and fundamentals of the company to outline plausible scenarios for the future.

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Zillow Stock – Technical Analysis

The price of Zillow had been steadily declining since the January-February meme stock craze and even though it briefly broke the descending triangle formation shown in the chart a few days ago it has not yet posted a higher high.

Back in June this year, we wrote that a rejection of the $124.5 resistance would lead to a sizable correction in the price and that is exactly what happened. Initially, we only anticipated a 16% downside risk. However, the decline went much further as the value of Z stock lost 32.5% until it bounced off the $84 level.

As a result of today’s development, the price is effectively rejecting a move above the 50-day simple moving average and could soon retest that $84 horizontal support. However, momentum oscillators are still pointing to a positive short-term outlook as the Relative Strength Index (RSI) posted a bullish divergence while the MACD has surged to positive territory in the past few days and is being accompanied by steadily increasing positive histogram readings.

At this point, it would be important to assess the extent of the impact that Zillow’s decision to halt the purchase of new homes could have on the firm’s financial results to see if this is an exaggerated reaction by market participants.

Zillow Stock – Fundamental Analysis

Even though Zillow’s Homes segment accounts for a large portion of its top-line results, the bottom-line performance of this unit is particularly poor and it weighs on the group’s profit-generation capacity.

During the first semester of 2021, this unit generated a negative adjusted EBITDA of $241.97 million that was offset by the $556.1 million in positive adjusted EBITDA generated by the IMT segment – Zillow’s core business.

Meanwhile, during the second quarter of the year, the company successfully sold 2,086 homes and ended the period with an inventory of 3,142 homes.

What this indicates is that Zillow has enough inventory to possibly deliver total home sales similar to the first semester of 2021 in the next couple of quarters. After that, if the company does struggle to keep up with the pace at which it is renovating these properties, its top-line results could suffer.

However, since the unit is generating negative adjusted EBITDA, the fact that the percentage that the Homes unit contributes to Zillow’s revenues will likely decline could have a positive effect on the firm’s earnings-generation capacity.

Today’s reaction from market participants possibly reflects concerns about the company’s capacity to successfully scale up this program.

For the 2021 fiscal year, Zillow’s adjusted EBITDA according to the management’s guidance may land at around $600 million. This gives us a forecasted EV-to-EBITDA ratio of 37 for the company using Koyfin’s estimated enterprise value of $22.26 billion.

This ratio is particularly high compared to the average EV-to-EBITDA ratio of 9.4 for businesses that offer a similar service and favors the possibility that Zillow’s valuation may continue to decline in the future.

With this in mind, if the price breaks below the $84 threshold, one could anticipate the continuation of the downtrend, possibly eyeing the $77 level as a first landing zone for a 19% downside risk based on last Friday’s closing price.

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