Zillow's (Z) Completed M&A Deals, Stock Dividend Add Noise to Overstretched Valuation - Cowen

Cowen and Company is updating its model for Zillow (Nasdaq: Z) following a recent downgrade to Underperform last August.

Analyst Thomas Champion said the firm sees subscriber losses for Zillow in Q3. The analyst commented, Overall, we think agent subscriber trends are demonstrating signs of market saturation and 3Q could be choppy given Trulia integration. Z lost ~2k subs in 2Q for 11% y/y growth (below 25% y/y in 1Q and an est'd 54% y/y in 2Q14). For 3Q, we think it likely that Z will lose subscribers again (we forecast a 3k loss). Mgmt. has instituted a variety of changes in the qtr. including: i) impressions appearing on all ZG sites (Zillow, Trulia, and partner); ii) migration from share of voice to fixed impression sales; and, iii) sales force reorganization. While these are 1x items, there are longerterm issues as well given 1) Z is now out of the summer selling season and 2) mgmt. may push for higher pricing. As such, for 2016 revenue we remain below consensus, forecasting 11% y/y growth versus consensus 28% y/y est.

On recent M&A deals: Z has completed two recent transactions. In August, Z completed the purchase of DotLoop for a $108MM consideration. Additionally, on September 30th, Z announced the completion of the sale of Market Leader for $23MM. We are lowering our 4Q revenue forecast ($164MM vs $177MM) partially as a result of ML sale. Also, the transactions leave Z with $85MM less in cash and we are likely to see a goodwill write-down in 3Q. Looking ahead, we think more transactions are in store for Zillow given the creation of the Class C stock and as the company moves to increase revenue scale.

On valuation: In our view, Zillow trades at an unjustified multiple relative to peers. With Z trading at 6.7x ’16 EV/sales and 33.4x ’16 EV/EBITDA, this is more than a 100% premium to the group at 2.7x and 16.2x 2016 and inconsistent with decelerating growth. With the stock having handily outperformed the market since the stock dividend on 8/17, 3Q EPS in early November may be a reset.

For an analyst ratings summary and ratings history on Zillow click here. For more ratings news on Zillow click here.

You May Also Be Interested In

• TD Cowen Reiterates Buy Rating on Seagate Technology (STX)
• Waste Connections (WCN) Declares $0.285 Quarterly Dividend; 0.7% Yield
• Mid Penn Bancorp (MPB) Declares $0.20 Quarterly Dividend; 3.9% Yield