Zillow Stock Price Up 2.3% – Time to Buy Zillow Stock?

The price of Zillow stock is surging 2% this morning as a result of upbeat sentiment toward the tech sector while the stock went up as much as 7.5% last week. A closer look at the price action shows that Z has managed to bounce off a key support level lately which could result in some short-term upside potential.

Is Zillow a good stock to buy? Is the company’s business improving? The following article takes a closer look at Z’s fundamentals to see if this bounce could provide an appealing entry price for taking a long position in the company.

Zillow (Z) stock – fundamental analysis

Zillow is a company that facilitates real estate transactions by providing multiple services such as listing, mortgage brokerage, and payment processing. Founded in 2004, the firm currently employs around 5,500 people while its market capitalization currently stands at $29.4 billion.

Zillow sales have grown tremendously in the past 10 years, moving from $66.1 million back in 2011 to $1.62 billion last year excluding the home’s segment, resulting in a compounded annual growth rate of 37.7%.

The reason to exclude this revenue segment is that it distorts the business top-line performance as the value of homes sold is reported as revenue yet the net result of those transactions has little impact on the firm’s gross profits.

Excluding home sales, Zillow’s revenues grew at a slower rate of 17% last year and 7% before that.

Meanwhile, gross margins excluding homes have stood well above 90% for Zillow while the firm managed to trim its operating expenditures last year, which resulted in lower losses of $162 million compared to $305 million the firm had lost by the end of 2019.

Data from Seeking Alpha shows that revenue estimates for 2021 see Zillow’s sales landing at $5.5 billion. However, the homes segment has been accounting for half of the firm’s top-line results in the past two years, which would result in forecasted ex-Homes revenues of $2.75 billion. Based on that number, it seems that the market is valuing Zillow at almost 11 times its 2021 sales.

That number is particularly high considering that the firm’s growth rate has been slowing down recently. That said, the company’s elevated gross margins are particularly attractive, with Zillow being able to keep at least $2.48 billion of those in gross profits.

Meanwhile, by the end of 2020, the company had $2.3 billion in long-term debt including multiple convertible notes. That debt represents roughly a third of the firm’s total assets including goodwill while the company had $3.9 billion in cash and short-term investments, which results in a net debt of zero.

Once we exclude that cash from the firm’s valuation, we land at a much lower market cap of $25.5 that results in a P/S ratio of 9. Establishing a fair valuation for Zillow at the moment is quite challenging since, although the firm displays a significantly high gross margin, it is unclear if SG&A expenditures could be trimmed by the management without severely affecting the firm’s top-line results.

So far this year, the stock has shed almost 6% of its value. However, those that held Zillow stock during 2020 saw the value of their holdings surge by an eye-popping 130% as the pandemic benefitted online vendors.

Zillow (Z) stock – technical analysis

The chart above shows that the price of Zillow stock has bounced off a key support found at the $102.5 level while the price is now approaching an important resistance at around $124.5 per share.

A break above that level, which shows confluence between an upper trend line and a previous support level that should now become resistance, will likely result in the beginning of a new bullish cycle for Zillow.

On the other hand, a rejection of that level could result in a short-term plunge in the price, with plausible supports found at $110 and $102.5 for a 16% total downside risk.

Zillow’s valuation and fundamentals are not serving as potential tells of where the stock might be heading multiples are highly sensitive to sudden changes in market sentiment amid declining revenue growth and persistent losses.

Unless the price breaks above that $124.5 per share, the outlook for Zillow shares remains neutral in my view as the task of establishing a fair value for the firm is quite elusive.

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