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Is Zillow Stock Overvalued or a Buy at Current Levels?

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Headquartered in Seattle, Zillow is the leading real estate marketplace in the U.S. It’s a go-to place for many prospective real estate buyers and sellers, as well as those looking for a rental home. Zillow stock has more than doubled this year even as the company is posting losses. Is Zillow stock overvalued or should you buy at these prices?

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Zillow stock price history

Zillow was founded in 2006 and went public in 2011. It priced its IPO at $20. Based on current stock prices, Zillow has risen over five-fold since its IPO. Looking at this year’s price action, Zillow fell to a 52-week low of $20.04 in March, to almost its issue price. However, since then it has surged and made a 52-week high of $112.49.

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Tech stocks have rallied this year. Also, given the record low mortgage rates, the real estate market has picked up. Both of these factors are positive for Zillow. While U.S. tech stocks crashed in September, they have looked strong this month and have recouped most of their September losses.

Is Zillow stock a buy?

According to the data compiled by TipRanks, 11 out of the 20 analysts covering Zillow have a “buy” or equivalent rating on Zillow. Seven analysts have given it a “hold” rating while the remaining two analysts have a “sell” rating on Zillow.

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Zillow’s average price target of $90.56 is below its current stock prices. Zillow has a Street high price target of $140 from Deutsche Bank that raised its price target by $25 earlier in October. Zillow’s Street low price target is $28.

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Is Zillow stock overvalued?

Zillow has posted a net loss in the last four financial years. Therefore, we cannot value it based on the price to earnings multiple. Zillow stock currently trades at an NTM (next 12 months) price to sales multiple of 7.3x. the multiple peaked near 20x in June 2014 and fell to an all-time low of 1x in March 2020 as the stock crashed.

Now, the valuation multiples should be seen in the context of the business model and the expected growth. For instance, Zoom Video Communications and Snowflake are trading at NTM price to sales multiples that are above 50x. However, both these companies are witnessing exorbitant growth.

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In Zillow’s case, growth has been uneven. The company’s revenues increased 31.3 percent year over year in 2016. However, the growth rates fell to 27.2 percent in 2017 and further to 23.8 percent in 2018. While Zillow’s revenue growth expanded 106 percent in 2019, its net losses also widened from $120 million to $305 million over the period.

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Zillow has expanded into the home-flipping business too, which is capital intensive. Mortgage originations and ad revenues primarily from the realtors who advertise on the site are the two other business lines. The company is not exactly comparable to other tech stocks that have a low capital expenditure business model and can generate strong cash flows. Zillow stock looks overvalued looking at the multiples and its business model.

From a technical perspective also, Zillow stock looks to be in the overbought territory. Its 14-day RSI (relative strength index) is 65.32. Traders see RSI values above 70 as signs of overbought positions. RSI values below 30 are seen as oversold positions.

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