While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Zillow (NASDAQ:ZG) slipped 4% today after RBC Capital downgraded the real estate website operator from outperform to sector perform.
So what: Along with the downgrade, analyst Mark Mahaney planted a price target of $115 on the stock, representing about 3% worth of downside to Friday's close. So while momentum traders might be attracted to Zillow's price strength in recent months, Mahaney's call could reflect a sense on Wall Street that the company's valuation is becoming a bit stretched.
Now what: According to RBC, Zillow's risk/reward trade-off isn't too appealing at this point. "Per our recent Crawling Out of The Carnage report, Z has been a material outperformer in the Internet sector this year," said Mahaney. "Given the steady improvement we have tracked with Z's fundamentals, we believe this outperformance has been justified. However, with the stock now trading at 48X '15 EV/EBITDA and 12X '15 EV/Sales -- among the highest multiples in the sector -- we see valuation upside as limited from here." With Zillow continuing to boast a rock-solid balance sheet and attractive long-term growth prospects, however, that concern might provide patient Fools with an opportune entry point.
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Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends Zillow. The Motley Fool owns shares of Zillow. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.