Weekly Equity Idea Highlight - 2018 07 25
Current market expectations for ZG are overly pessimistic. While UAFRS-based (Uniform) ROA has improved materially since they acquired Trulia and took out their largest competitor, the market is expecting ROA' to decline back to the lower end of historical levels. Also, while ZG is now the largest player in their space, they still only see a fraction of the total revenue from the real estate market, meaning expectations for Asset' growth to trend to the low end of historical levels appears overly pessimistic. Considering low market expectations and the company's historical performance and growth opportunities, there appears to be equity upside potential.Also, ZG management are entirely compensated on focusing on monetizing their platform by developing new products, and around revenue growth. For a company with substantial market opportunity still in a heavy growth phase of their lifecycle, this is a completely appropriate compensation framework.
Finally, Earnings Call Forensics of management's recent calls highlights that management is not showing concerns about their core business that would justify market expectations for declining fundamentals and growth, and are confident about their capital allocation and cost outlook for their new Homes segment. Visibility in the core business and controls around their innovative investment growth point to strong fundamentals.
Considering low market expectations, the company's sizable addressable market they can grow into, strong management alignment, and management's favorable long-term outlook for the business, current low equity valuations appear unreasonable, spelling potential for equity upside.
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