Deutche Bank raised the price target for Zillow Group to a ‘street high’ of $140, crediting data showing consumers are attempting to increase their comfort at home during the pandemic. Analyst Lloyd Walmsley joins The Final Round panel to discuss.
Video Transcript
MYLES UDLAND: All right, let’s turn now to our call of the day. Today, we talking about Deutsche Bank’s latest note on shares of Zillow. The firm maintains a buy rating on the stock, raising their price target to $140 per share. That’s up from 115. And we’re joined now by Deutsche Bank Research Analyst Lloyd Walmsley to talk about this call, so Lloyd, thanks for joining the show. Let’s just start with kind of what you guys opened the note here and referencing Opendoor, a company that came to the markets via a SPAC just in the last couple of weeks, and how, I guess in your work, that maybe sets or helps investors understand a little bit better where Zillow is at right now.
LLOYD WALMSLEY: Yeah, so we’ve been having a really tough time valuing the core home segment that the company rolled out a few years ago where they’re buying houses, fixing them up a little bit and then reselling them. It’s a venture-like business. I mean, they’re investing a lot of money. It’s not going to be profitable for several years. We’ve had trouble valuing that. That is essentially what Opendoor is, and Opendoor, we can now get a valuation on through the IPOB SPAC that it has agreed to acquired. And so we use that now to help value Zillow’s business, and it’s compelling. It’s worth almost $50 per share for Zillow, for that business, and that is the primary reason we took our target price up today, although there’s lots of other reasons we’re bullish on the stock over the next year or beyond that.
MYLES UDLAND: Yeah, well, I mean, if you look at Zillow, they’ve had a number of catalysts within the last year, and I guess we could kind of take them in order. I would ask just to kind of start, and maybe this steps back from the pandemic, but Rich Barton rejoining the business, is that an event that that kind of started to maybe change the way investors thought about it? And then maybe we can talk about how COVID and the change that people have in terms of their homes has set the business on a different– or at least a stock on a different kind of trajectory.
LLOYD WALMSLEY: Yeah, I do think Rich Barton coming back changed the perspective on the stock. I mean, it’s always been a very controversial stock with some ferocious bulls, some ferocious bears. And when Rich came back, you know, I think there were questions around this I buyer business, but a lot of the bears immediately said, I don’t want to short Rich Barton, and so that was the beginning, I think, of a lot of covering in the stock. And then, you know, at the end of last year, the company really started to fix a change they had made to their core advertising product in early ’19, and so they really got the product right.
And if you go back to when they reported the first quarter, while the pandemic had started, they said January and February had seen nice acceleration, and so they were really on a great trajectory before COVID. We saw a freeze up for a minute during COVID, and now everything’s bouncing back spectacularly in the real estate industry. So that’s been kind of the most recent evolution, I think, in the Zillow story.
DAN ROBERTS: Lloyd, Dan Roberts here. Let’s stick with the pandemic. I mean, to what extent has the pandemic and that supposed suburban exodus helped Zillow and all those other businesses? I feel like we’ve done a few segments here on our live shows during the pandemic about the various companies that either have started offering more services for or have just launched to offer the service of virtual house tours, and more people are making the decision without even going to visit a house. Has Zillow benefited from that? It actually sounds like more of the plus column for Zillow came before the pandemic.
LLOYD WALMSLEY: Yeah, it’s a great point, and it’s a bunch of pluses. So for starters, you know, it’s harder to go out and see houses. There’s more activity going on through Zillow’s website. It’s harder for agents to hold open houses where they get a lot of their new client leads, and so they’re more dependent on Zillow. There’s been, you know, a burst of activity in people coming out of COVID looking to move. We’ve done a lot of survey work internally at Deutsche Bank on the likelihood of people both wanting to work from home more even after COVID and then looking to potentially move to a house where they get more room because they can work more from home.
In our note overnight, we highlighted recent survey results showing an increasing percentage of people that we survey, their employers are more comfortable, even after the pandemic, working more from home. So, you know, we think this can unleash an elevated amount of moving for the next few years coming out of this. Obviously, we’ll have to see once we get a vaccine do some of these intentions fade. But at least everything we’re seeing right now, there’s a lot of interest in people moving to more suburban locations, you know, where they will tolerate a longer commute, because they intend to work a little bit more from home, they want more space, and so I think that’s really bullish for Zillow.
MYLES UDLAND: And then thinking about some of these structural tailwinds, Llyod, I guess for Zillow, the housing market itself, when you look at supply, demand and dynamics right now, I think there were three month supply of new home sales, you know, per the Census’ last report, which is essentially nothing on the market. Does that sort of dynamic help a company like Zillow where most people there are going to be scouting an existing home or neighborhoods in most cases that are already built up and it’s kind of a, again, it’s an existing home type market more than it is, you know, a developer, you know, buying a new plot and selling it off kind of situation.
LLOYD WALMSLEY: Yeah, I think it would be better for Zillow if there was more supply on the market and effectively enabling more transactions to happen. Ultimately, their agents are buying ads on Zillow, and the way they evaluate those is, did I get a close coming off of this lead from Zillow? So I do think more supply would be good, but I think you make a good point. Most of Zillow’s business today is people focused on looking to buy.
And so if it’s harder to buy and they spend more time on the website and ultimately, you know, connect with an agent, there’s still a lot of value in that. And so they’re not quite as directly tied to transaction activity as one might think. So they can thrive in a low supply market, but it would probably be a net positive if we did see more people coming to market with inventory.
MYLES UDLAND: All right, Lloyd Walmsley, Analyst with Deutsche Bank, again, firm out with the new price target on shares of Zillow, $140 per share. Lloyd, thanks so much for joining the program. We’ll talk soon.
LLOYD WALMSLEY: Thanks for having me.
