Zillow Stock Up 8% Today – Time to Buy Z Stock?

The price of Zillow stock is up 8% this morning in pre-market stock trading action following news that the company has managed to unwind its inventory of properties faster than expected and, as a result, it is approving a share buyback program.

According to a press release published yesterday, Zillow has signed agreements or sold up to 50% of the inventory it expected to wind down as a result of its decision to discontinue its property-flipping business.

The Board of Directors has authorized the repurchase of up to $750 million in Class A and Class C shares with the proceeds obtained at a point when the price of Zillow stock is trading 74% below its 52-week high of 208.11 per share.

“We are pleased with the progress of our wind-down efforts and recognize that no longer operating Zillow Offers will allow us to have a more capital-efficient balance sheet and business moving forward”, stated Rich Barton, Zillow’s Chief Executive Officer.

He added: “With that, we see today as an opportune time to announce a share repurchase program and reduce the cash balance we built up to support Zillow Offers”.

The company still expects to be cash-flow neutral despite the inventory losses and other expenditures resulting from the wind-down while Zillow will use a portion of the proceeds to fully pay the $2.9 billion that this segment of the business initially took.

Market participants appear to be reacting positively to the news as Zillow will once again focus on what has always been its core business.

What could come next for this tech stock? In this article, I’ll attempt to draft some scenarios for the future as we head into the end of the year.

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Zillow Stock – Technical Analysis

In a previous article about Zillow, I highlighted that multiple horizontal supports could act as a landing zone for the real estate technology stock in case its Q3 2021 earnings report disappointed investors.

Notably, the price went down as much as 25% on the day that the report came out after multiple Wall Street analysts downgraded the stock after the management announced that it will be discontinuing the home-flipping business.

This decline broke both of the support areas we highlighted in this previous article and that led to a sustained decline in the stock price. Trading volumes back then were particularly elevated as they exceeded the 10-day average by nearly 7 times.

Meanwhile, even though today’s pre-market uptick seems encouraging, the overall picture remains relatively bearish as the stock price will still be below its short-term moving averages.

That said, the stock may have bottomed already as this share repurchase shows that the management strongly believes that the firm is currently undervalued. To put this $750 million into context, the market capitalization of Zillow currently stands at $13.8 billion, meaning that the Board has approved the repurchase of nearly 5% of the firm’s total shares outstanding.

If the price of Zillow stock breaks the $79 level in the following weeks, the outlook for the stock would be bullish as this event would show that market participants have recouped their confidence in the company and its management amid the successful wind-down of the home-flipping unit.

Zillow Stock – Fundamental Analysis

Moving forward, Zillow’s IMT segment will dominate the firm’s top-line performance. During the nine months ended on 30 September, the company brought $1.4 billion in revenue from this segment and produced $407 million in profits before taxes for the business.

Meanwhile, the unit’s gross margin was 29% while the adjusted EBITDA of the IMT segment was $633 million resulting in a 45% margin.

Using the management’s forecast for the upcoming fourth quarter of the 2021 fiscal year, Zillow’s IMT segment will likely produce total revenues of $1.9 billion and adjusted EBITDA of around $835 million.

Last year, Zillow’s IMT adjusted EBITDA was $556.14 million and back in 2018 it was $245.94 million resulting in a 3-year CAGR of 50%.

According to data from Koyfin, the enterprise value of Zillow is standing at $15.22 billion. However, if we incorporate the expected $2.9 billion debt repayment that number would decline to $12.3 billion.

Using that figure, the EV/EBITDA multiple for the firm would now stand at 14.7 times – a multiple that seems conservative based on the firm’s track record of adjusted EBITDA growth.

With this in mind, there are reasons to believe that Zillow stock has bottomed already and market participants may now be ready to accumulate again as the company will emerge largely unscathed from this failed pivot.

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