COVID-Induced Housing Boom Provides Tailwind for Zillow

Zillow Group Z reported impressive fourth-quarter results, with the firm benefiting from the countercyclical effect of a buoyant housing market amid the coronavirus-induced economic recession. For the fourth quarter, the firm reported total revenue of around $789 million, a 16% decrease from the fourth quarter of 2019. Full-year 2020 revenue came in at $3.3 billion, a 22% increase from 2019. Companywide adjusted EBITDA showed improvement in the positive environment, coming in at $170 million for the quarter, a significant improvement from negative $3 million for the fourth quarter of 2019. Full-year adjusted EBITDA was $343 million, sharply higher from $39 million during 2019. Despite the impressive recent financial results, we are maintaining our $42 fair value estimate for no-moat-rated Zillow Group.

Although we recognize the encouraging housing market environment, we currently view the shares as significantly overvalued. Investors appear giddy about the countercyclical nature of the housing market and Zillow’s solid competitive position within it. Nevertheless, this environment is a direct result of the current environment, which has forced individuals to spend increasing amounts of time in their homes, thus compelling many to find new ones. In this sense, we do not view the coronavirus-induced housing boom as a justification for the extremely lofty levels that Zillow’s share price has been recently reaching.

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