When The Dust Settles, Buy Zillow

An 800 point drop in the Dow Jones yesterday was enough to shake the cobwebs off any investors who’d been getting too cosy in recent weeks. It’s been a while since we had a day like that but it’s been coming. Talk of a frothy market had been getting louder as were comparisons to 1999. As we noted yesterday, the VIX has been steadily gaining since the middle of August even as markets hit all time highs, a major red flag in and of itself.

When the market is a sea of red, it can be a good time for investors to do a deep dive into their watchlist and see if some value pops up in stocks they’ve been waiting to get involved in. Especially after a summer like the one we’ve had, where tech names just ripped higher month on month, many investors were left chasing entries and never got them filled.

Bullish Action

One such company that’s surely on a few watchlists is Zillow (NASDAQ: ZG), the online real estate database. On Tuesday their shares hit an all-time high and came within a few percent of logging a full 400% rally from the lows of March. They’ve come out of the coronavirus pandemic stronger than ever, which is a fairly impressive statement considering they went into it stronger than ever as well.

After reporting earnings in the middle of February, their shares had hit all-time highs. Then along came COVID and they took a jaw dropping 70% nosedive as part of the biggest market crash in recent times. That firesale clearly didn’t last too long and any weakness we see in the coming sessions is unlikely to be permanent either.

Zillow’s latest earnings from last month showed investors just how well the internal engine is ticking over. Both EPS and revenue came in ahead of expectations with the latter and impressive 24% higher than the consensus and up 28% year on year. The company’s Offers unit performed particularly well, with revenues from there growing more than 80% year on year.

CEO Rich Barton said the results were "even better than we had hoped, and firm up our belief that powerful tailwinds in both real estate and technology are rapidly converging, with Zillow at the nexus.I believe we are at the dawn of a Great Reshuffling, as COVID and work-from-home policies are inspiring people to rethink their homes and consider moving. In addition, real estate, like other industries, is experiencing an acceleration in technology adoption, as people move their shopping habits from offline to online."

Multiple Upgrades

It looks like the stars are starting to align for everyone’s go-to real estate database. On Tuesday, Deutsche Bank threw their lot in and upgraded shares from Hold to Buy. They also slapped a $106 price target on which from Thursday’s closing price represents about a 25% move north. Analyst Lloyd Walmsley is particularly bullish on the company’s Offers segment as well as general home buying activity, with mortgage applications last week up 35% year on year.

Their bullish sentiment echoes that of JMP Securities who raised their price target on the stock in July, citing a faster than expected rebound in the housing market. Needham also upgraded shares back in June, noting how Americans are more willing than ever to work with an online real estate agent.

Zillow is at the point where every other online real estate database is compared against theirs, which isn’t a bad place to be. Real estate and the internet are two industries which are going nowhere anytime soon, and any sustained weakness in Zillow shares should be viewed as a buying opportunity. This is one to hold for the long term.