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The Ratings Game: Buy Zillow stock now to profit from ‘brighter environment’ next year, UBS says


Investors should buy Zillow Group Inc. now, UBS says, even if they have to wait a year before the U.S. housing market starts improving.

Analyst Lloyd Walmsley initiated research coverage of the online real estate subsector, saying while he fully expected housing trends to deteriorate in the near term, he was optimistic fundamentals will rebound in 2024.

He started Zillow at buy with a $50 stock price target, which implies about 29% upside from current levels. For UBS, a buy rating means the analyst’s forecast stock return (FSR) is greater than 6% above the market return assumption (MSR).

“We see the current period of maximum uncertainty as a good entry point for buy-rated Zillow shares of long-term investors,” analyst Lloyd Walmsley wrote in a note to clients.

Zillow’s more-active Class C shares


rose 0.9% to close at $38.68 on Friday, the highest closing price since Aug. 15. It has rocketed 43.4% since closing at a 2 1/2-year low of $26.97 on Oct. 14.

Walmsley’s initiation came after data out this week showed that pending home sales in October fell for the fifth-straight month and home prices in September declined for a third-straight month. Data out earlier this month showed that existing home sales retreated for a record ninth-straight month.

“A year from now, we expect to be looking ahead to a brighter environment, with UBS economists expecting interest rates to be on their way down, easy [year-over-year] comparisons and pent-up housing demand,” Walmsley wrote.

He said his checks with agents support his belief that Zillow can monetize higher transaction volumes and drive strong revenue growth “on the other side” of the current environment.

Walmsley also initiated coverage of fellow online real-estate company Compass Inc. with a neutral rating, while his $2.75 stock price target implies about 15% downside from current levels.

The stock

climbed 1.9% to $3.27.

“We see a balanced risk/reward in our upside and downside scenarios,” Walmsley wrote.

He expects the company will achieve free-cash-flow (FCF) breakeven in 2023, but sees longer-term revenue growth as a “show-me” story. The company went public in April 2021, about 10 years after Zillow went public.

Zillow’s Class C stock has gained 13.6% over the past three months and Compass shares have rallied 18.9%. But year to date, shares of Zillow have dropped 39.4% and Compass have plunged 64.0%, while the S&P 500 index

has lost 14.6%.

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