Guggenheim Upgrades Zillow, 'Building Comfort' In The Offers Business

Zillow Group (NASDAQ: ZG) vision to digitize the real estate market will take "years to fully realize" but the bullish case for the stock can now be made, according to Guggenheim Partners.

The Analyst

Guggenheim's Jake Fuller upgraded Zillow from Neutral to Buy with a new $45 price target.

The Thesis

Zillow is among a handful of companies dedicated to "digitizing things," but Fuller said its business model is complex and unprofitable. Among one of the more "skeptical" business lines, the company's Offers business allows homeowners to sell their property directly to Zillow. For the business idea to work a homeowner likely needs to sell their property at a discount to its fair market value for Zillow to turn a profit.

Fuller said recent results alleviate concerns related to the demand for the Offers service as Zillow bought 499 homes in the fourth quarter of 2018 and 898 homes in the first quarter of 2019. The company said it received a total of 35,000 requests in the first quarter, which suggests demand exists for the service.

Longer-term profitability for Zillow remains a "key question" but the company has proven it can generate a unit level profit as it made $1,700 per home in the fourth quarter, the analyst wrote in the note. Coupled with earnings potential from loans and seller leads, the company is modeled to record an EBITDA of $375-$880 million in a three- to five-year period.

Price Action

Zillow's stock traded higher by more than 5.4 percent Wednesday at $38.52.

Related Links:

Zillow's New Homes Business Drives Big Revenue Jump, Pushes Stock Higher

Guggenheim Says Zillow's Home Segment Off To 'Strong Start' In 2019

Photo courtesy of Zillow.