Zillow has been treading water for the past six months, recording a small return of 1.4% while holding steady at $77.87.
Is now the time to buy Zillow, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Zillow Will Underperform?
We don't have much confidence in Zillow. Here are three reasons why there are better opportunities than ZG and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Zillow’s demand was weak and its revenue declined by 7.6% per year. This was below our standards and signals it’s a low quality business. 
2. Operating Losses Sound the Alarms
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Zillow’s operating margin has risen over the last 12 months, but it still averaged negative 10% over the last two years. This is due to its large expense base and inefficient cost structure.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Zillow’s ROIC averaged 4.9 percentage point decreases over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Zillow falls short of our quality standards. That said, the stock currently trades at 40.9× forward P/E (or $77.87 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at one of our top digital advertising picks.
Stocks We Would Buy Instead of Zillow
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