ZG - Embedded Expectations Analysis - 2018 05 25
Zillow Group, Inc. (ZG:USA) currently trades near historical highs relative toUAFRS-based (Uniform) Earnings, with a 32.5x Uniform P/E. However, even at these levels, the market is pricing in fairly bearish expectations for the firm. Although negative management sentiment suggests near-term upside may be limited, these overly-bearish expectations are likely to support longer-term outperformance should ZG just maintain profitability at current levels
Specifically, management may lack confidence in their ability to drive a 1% to 2% net profit in their Homes business, and may be exaggerating their understating of buyer demand. Additionally, they may have concerns about the debt in their Homes segment being secured by the homes themselves, not the company, and may lack confidence in their claim that their Rentals business could be significantly larger in the next few years than their 2018 guidance indicates. Moreover, they may be exaggerating the extent to which their total addressable market in the Homes segment is larger than the homes available to the traditional home flipper, and may be concerned about the unanticipated pressure on their EBITDA during Q1
That said, market expectations are for Uniform ROA to fall to levels not seen since before 2011. At these valuations, should the firm simply maintain Uniform ROA at current levels, equity upside is likely warranted
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