Enhanced Markets, Home Loans, And Redfin Will Strengthen Future Position

Key Takeaways

• Expansion of the Enhanced Markets strategy and mortgage revenue growth position Zillow for increased customer transactions and earnings acceleration.
  
• Partnerships and platform expansion enhance reach in rentals, fueling future revenue and improved margins.
  
• Zillow's ambitious growth strategy involves substantial investments and integration challenges, with housing market conditions potentially impacting revenue and profitability expectations.

Catalysts

Operates real estate brands in mobile applications and Websites in the United States.

• Zillow's focus on expanding its Enhanced Markets strategy is expected to significantly increase their share of customer transactions, which will drive future revenue growth and higher conversion rates. This is likely to impact both revenue and earnings.
  
• Growth in Zillow's mortgage revenue, particularly through Zillow Home Loans in Enhanced Markets, is poised to accelerate earnings, demonstrated by an 86% year-over-year growth rate in Q4 2024 for mortgages revenue, suggesting future cash flow and earnings expansion.
  
• The partnership with Redfin to provide multifamily rental listings is expected to enhance Zillow's reach and engagement, positioning them for growth in rental revenue, which could drive earnings and future cash flow.
  
• Zillow Showcase, with a goal to reach 5% to 10% of U.S. listings, provides an opportunity to capture more revenue and grow net margins by optimizing agent branding and transaction speed, which could lead to increased earnings potential.
  
• Continued expansion of Zillow's rental platform and integration of services (e.g., new home listings and serving a wider renter audience) may lead to incremental revenue growth and improved EBITDA margins as they build toward the $1 billion-plus rentals revenue mark.

Zillow Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Zillow Group's revenue will grow by 14.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -5.0% today to 11.1% in 3 years time.
• Analysts expect earnings to reach $372.4 million (and earnings per share of $1.35) by about May 2028, up from $-112.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $614 million in earnings, and the most bearish expecting $230 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 73.0x on those 2028 earnings, up from -142.5x today. This future PE is greater than the current PE for the US Real Estate industry at 25.0x.
• Analysts expect the number of shares outstanding to grow by 2.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.45%, as per the Simply Wall St company report.

Zillow Group Future Earnings Per Share Growth

Risks

• While Zillow has shown strong growth, the broader housing market remains challenged with low transaction volumes, impacting potential revenue growth.
  
• The company's heavy focus on growing its Enhanced Markets and mortgage offerings requires substantial investment; slower-than-expected adoption could impact earnings and net margins.
  
• Zillow's growth strategy relies significantly on successful integration of its mortgage and real estate offerings. Any difficulties with these integrations could limit revenue prospects.
  
• The company has made extensive investments in new partnerships and acquisitions. If these do not generate expected returns, revenue and net margins could be adversely affected.
  
• Zillow's expectation of significant market share growth assumes a recovering housing market. A prolonged downturn or stagnation could impact expected revenue and profitability.

Valuation

• The analysts have a consensus price target of $83.921 for Zillow Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $110.0, and the most bearish reporting a price target of just $60.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.3 billion, earnings will come to $372.4 million, and it would be trading on a PE ratio of 73.0x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $66.14, the analyst price target of $83.92 is 21.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.