Zillow Stock NASDAQ:ZG Soars Following Piper Sandler Upgrade

Zillow Group (NASDAQ:Z) (NASDAQ:ZG), the leading digital real estate marketplace, has recently been in the spotlight as it saw a significant stock climb of 5.5% in Tuesday premarket trading. This surge is credited to Piper Sandler's upgrade of the Zillow stock from Neutral to Overweight. This upgrade was largely driven by share gains, improving macroeconomic conditions, and a promising near-term outlook for the company.

The primary catalyst behind this upgrade was Zillow's consistent share gains in the Premier Agent business. Thomas Champion, the analyst at Piper Sandler, highlighted that Q1 marked the highest Y/Y share gain since 2018. The Premier Agent platform provides support through a network of trusted real estate professionals, becoming an essential part of Zillow's services.

Another factor contributing to the bullish outlook for Zillow is the improving macroeconomic backdrop. With home sales growth potentially bottoming out in the previous quarter, the stabilizing mortgage rates should spur demand in the near future. Despite mortgage rates being higher than the previous year, their stabilization at current levels is a positive sign for real estate companies like Zillow.

Piper Sandler's Overweight rating aligns with the average sell-side analyst rate of Buy. This positive sentiment

As the real estate technology landscape evolves, Zillow Group (NASDAQ:Z) (NASDAQ:ZG) continues to carve a solid niche. The stock observed a significant uptick, escalating 5.5% in Tuesday's premarket trading. This was catalyzed by Piper Sandler's upgrade of the digital real estate stock to Overweight from Neutral, marking an upturn from its previous outlook. The upgrade was rooted in the company's improving macroeconomic conditions and share gains, which instill a positive near-term forecast.

A crucial contributor to Zillow's progressive performance is its Premier Agent business. The company's Q1 performance registered its strongest year-on-year share gain since 2018, a fact emphasized by Piper Sandler analyst, Thomas Champion. Concurrently, the real estate environment is showing positive signs. Champion noted a likely bottoming-out of home sales growth in the last quarter, while mortgage rates, despite being higher than last year, have stabilized at current levels, stimulating potential demand.

Such a perspective aligns with the average sell-side analyst rate of Buy. Shares of Zillow (Z) marked a monthly gain of 6.8% and an impressive 42.3% Year-to-Date (YTD). A testament to the company's strength is the increasing faith in the future of the housing market, causing Zillow's stock to surge in response.

Thomas Champion went further, increasing his price target on the stock to $62 from $42, implying a potential upside of more than 20% from the current market price. With Zillow's stock up 9.6% to $51.08 in Tuesday trading, the YTD gain has climbed to a hefty 63%.

Champion also revised upwards his estimates for revenue, gross profit, and earnings before interest, taxes, depreciation, and amortization (EBITDA) through 2024. He cited several driving factors behind the improving setup for Zillow, including continued Premier Agent share gains, product optionality and new initiatives, and a resurgence in housing macro with expected sequential improvements through 2024.

The Premier Agent platform, offering a reliable network of real estate professionals, was highlighted as a significant strength. Interestingly, Zillow stock now trades at an approximate 25% discount to the 2015-2018 period, based on enterprise value over next twelve months' EBITDA.

However, this uptick comes amid high housing costs and mortgage rates, leading to a slowdown in existing-home sales. As of May, sales of previously owned homes were sold at a seasonally adjusted annual rate of 4.3 million, a 20% drop from 2022. Buyers have been cautious about high mortgages, and sellers have shown a preference for sticking with their lower rates.

Champion further raised his price target on the shares to $62 from $42, envisioning a better future for Zillow, "We think an improving macro & share gains on top of easy compares sets up [Zillow] well into '24,” he stated in a note to clients.

From the broker advertising budget perspective, Zillow has shown promise in consistently winning a larger share. The first quarter marked a significant year-over-year share gain performance for the company's Premier Agent business since 2018. The stock was up by 3% in pre-open trading Tuesday following Piper Sandler's upgrade.

What underpins this positive outlook is Zillow's agility in adapting to business model shifts. The real estate technology giant has evolved significantly by adopting a capital-light business model. The company recently reported its financial results for the first quarter of 2023 (ended March 31), indicating progress after winding down its iBuying (direct buying) segment over the last two years.

Although the cessation of the iBuying segment led to a substantial decline in revenue, Zillow's business is now in a healthier financial position. The stock remains 77% below its all-time high, but the company's strategic shifts might be a good reason for investors to consider it as a valuable addition to their portfolios.

Zillow's reorientation towards agent services, closing services, mortgages, and in-person touring, following the exit from the iBuying business, signifies a significant strategy shift. The company estimates a typical real estate transaction involves $17,000 in various fees for such aspects as the mortgage, seller services, and closing services. Zillow's goal is to enhance its capture from the current $4,100 to $5,200 by 2025.

The company's digital presence has grown substantially, serving 212 million unique users across its online platforms each month, with 2.5 billion total visits in Q1. They're leveraging technology like OpenAI's ChatGPT to improve user experience, allowing users to interact with an AI-powered chatbot for inquiries about property listings.

Zillow's new business model, focusing on higher-profit-margin real estate services businesses, presents significantly less risk. Following this shift, the company's adjusted EBITDA fell 53% YoY during Q1. However, given the exit from Zillow Offers, revenue dropped by a staggering 89%. Yet, the numbers hint at the prospect of a highly profitable 

Zillow's evolving business strategy targets capturing a larger portion of transactional costs in a real estate deal by focusing on agent services, closing services, and mortgages. This transition aims to make Zillow a one-stop-shop for home buyers and sellers, where they can search for properties, secure mortgages, and manage closing services on a single platform. By capturing more of these services, Zillow aims to increase its share of the real estate transaction, enhancing its revenue in the process.

With an impressive digital presence that brings in 212 million unique users each month, Zillow is well-positioned to capitalize on its scale and reach to further its new business strategy. Users can interact with an AI-powered chatbot for inquiries about property listings, offering a seamless and engaging user experience.

As the company moves away from the risk-heavy iBuying model towards its service-centric approach, there may be a transition period marked by declining revenue and profits. However, Zillow's strategic shift holds promise for improved profitability in the long run.

In conclusion, the Piper Sandler's upgrade and the upward price target revision reflect an overall bullish sentiment about Zillow's future. With its robust digital presence, innovative use of technology, and strategic pivot towards high-profit-margin services, Zillow presents a compelling investment case for long-term investors. Although there may be some short-term pain during this transition phase, the company's strategic reorientation and strong market position make it well-poised for future growth.
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