Watch For An Entry Point In Zillow (NASDAQ: ZG)

One of the many things in 2020 that had experts scratching their heads was how well the housing market performed. Typically in recessions and periods of major uncertainty, foreclosures go up and prices fall. For companies like Zillow (NASDAQ: ZG), one of the largest online multiple listing services out there, this is typically a bad thing for business.

However, the housing market didn’t just stay propped up in 2020, it actually thrived well beyond expectations. Shares of Zillow, who had only just topped their previous all time high from 2018 when the pandemic struck in February, were perfectly positioned to ride that wave; last month’s high had them up more than 700% from the lows of Q1. They’ve cooled a little in the two weeks since but for any investor looking on from the sidelines, the potential for a sweet entry spot is opening up.

Fresh Upgrade

During yesterday’s session, Wedbush analyst Ygal Arounian alerted the rest of Wall Street to the opportunity at hand when he upgraded shares from Neutral to an Outperform rating. Arounian is bullish on Zillow’s technology continuing to allow it to capture market share as the technological transformation of the real estate industry continues to accelerate. This acceleration has been bolstered by the strength seen in the housing market over the past year as well as the new work-from-home environment.

These comments echoed those of Zillow CEO Rich Barton after the company’s Q3 earnings in November; "many of us are re-evaluating where we live and how we live, which has kicked off a Great Reshuffling, and we need safe, digital ways to get to a better place. Given the duration of this pandemic, the concrete is setting on new digital solutions for life and work. This is driving record demand for housing and record engagement with Zillow's leading digital real estate brands. When combined with level-headed cost decisions, the result has been profitable growth."

Bullish comments indeed. Arounian also upped his price target on shares from $118 to $167, suggesting upside of more than 20% from Wednesday’s closing price.

Risks Remain

With all that being said, there are some risks that investors would do well to take notice of. The bear camp will point to the fact that record low interest rates can’t stick around forever, and any uptick in them will have a negative effect on the housing market. In addition, US homeownership rates are at a 10 year high, which is the housing market equivalent of a stock’s RSI being above 70. Compounding these factors is the fact that US housing inventory is at a 10 year low.

There’s a good argument to be made that in the short term at least, the housing market is more likely to decline than to continue ramping, which means Zillow shares should continue to cool off, or at the very least consolidate. After a 700% run in less than a year, they’re well entitled to.

But there’s no doubt that technology is the way of the future and the real estate market is still undergoing a full digital transformation meaning there’s still a ton of addressable market share to be captured. With Zillow having cemented its spot as the market leader over the past year, it’s in a great position to continue that trend in the longer term.

Investors should keep an eye on Zillow through the first few months of Q1 and consider any weakness in shares to be an appealing entry for the long term growth potential.