Buy Zillow Stock for Improving Fundamentals, Analyst Says

Zillow may be worth more than the headcount its 160 employees generate in annual revenue, an analyst said in a note to clients earlier this week. As InvestorPlace’s Zachery Kouwe previously reported, Zillow’s 1,061 active buyers and 1,061 active sellers contribute $4.85 billion in annual revenue but generate only $13.12 million in marketing costs. That lack of a revenue-based overhead is why Zillow’s total GAAP costs and expenses increased $46.5 million, or 54 percent, in the first quarter compared to the same quarter last year.

The average analyst estimate for Zillow’s annual sales, $594.43 million, represents a 43 percent decrease from the $863.36 million reported last year, but the company’s break even point could be $133.50 million or less than the cost of advertising, according to Seth Wheeler, an analyst with Macquarie Capital.

Zillow just ended May with nearly 300 million annual visitors, and Macquarie forecasts at least $464 million in net revenue for May 2019, Wheeler said in the note. If Zillow’s base has any continued growth, and the company’s marketing costs (which make up the bulk of operating costs) are under $130 million, Zillow could “shrink its cash flow breakeven point to perhaps as low as $130 million of revenues,” according to Wheeler.

This is an interesting theory, given the minimal profits the company makes from its product. Zillow lost $69.5 million, or $1.71 per share, in the first quarter, losing $600,000, or 2 cents per share, on $138.6 million in sales, for a net loss of $53.6 million, or 90 cents per share. Zillow recorded a $21.8 million (5 cents per share) profit in the first quarter of 2018.

Zillow said in April that it planned to shed up to 300 jobs in Seattle. All staff cuts would have been completed in the coming days, Zillow spokeswoman Elise Li said in an email to TechCrunch.

Macquarie said Zillow would reinvest the $2.4 million the company saves per 100 job cuts, and potentially use some of the $20 million in annual savings per 100 job cuts to invest more in marketing and talent, to facilitate a rise in its revenue going forward. Zillow has been implementing changes to its service as a result of a legacy business, Wheeler said, and the changes might make the company a more attractive buy, and a revenue generator, for big corporate acquirers.

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