Shares of Zillow (ZG) jumped on Wednesday after Guggenheim analyst Jake Fuller upgraded the stock to Buy saying its recent results prove that demand for Offers is "real" and unit profits are possible. The analyst expects the company's Offers business to surpass its ad business by the fourth quarter and generate greater than $1B revenue in its first full year.
BUY ZILLOW: In a research note to investors on Wednesday, Guggenheim's Fuller upgraded Zillow to Buy from Neutral with a $45 price target, saying that its recent results prove that demand for Offers is "real" and unit profits are possible. The analyst noted that the market has struggled to value to value a wave of businesses digitizing things like home buying, food delivery, transportation and private/work space. Zillow has been part of that debate as it ramps Offers, he contended, adding that he expects the company’s Offers business to surpass its ad business by the fourth quarter.
His positive view is based on the core advertising business that has stabilized, and Offers exceeding his expectations, with the analyst now seeing it topping ad revenue in the fourth quarter and doing over $1B of revenue in its first full year. Further, Zillow has already shown that Offers can be profitable on a unit basis, and the addition of Loans and seller leads could substantially increase the profit potential of the homes platform, he contended. Fuller acknowledged that Zillow has a long way to go to prove its 3-5-year targets, but said he is more comfortable that those targets are "feasible."
Additionally, the analyst noted that the Premier Agent advertising business appears to have worked through the disruption from its revamped the lead distribution process, with indications of normalized churn. While he no longer sees 20%-plus growth as feasible, he does see acceleration into the second half of the year and double-digit growth in 2019.
PRICE ACTION: In late morning trading, Class A shares of Zillow have gained about 5% to $38.36.