3 Reasons Zillow Inc. Stock Could Rise

Zillow Inc. stock keeps moving higher, but it doesn't have to end here.

Aug 18, 2014 at 3:52PM

Zillow, (NASDAQ:ZG) has become one of the market's biggest darlings. The online real estate database's stock has popped more than sixfold since going public at $20 three years ago. Despite its lofty valuation and a real estate revival that's showing signs of cooling off, the shares could continue to move higher.

Let's go over three reasons why Zillow stock might still rise, knowing full well that investors can sour on the dot-com speedster if the market or niche fall out of favor.

1. Buying Trulia will result in substantial synergies
An interesting thing happened when Zillow announced a couple weeks back that it was buying smaller rival Trulia (NYSE:TRLA): Zillow stock moved up. Usually a buyer shelling out a premium for a stock that already commands lofty multiples will get hit on the news of its voracious appetite, but the market saw through historical tendencies. 

The combination of two fast-growing real estate portals is clearly positive, and not just because of the cost-saving synergies and the power of the combined momentum.

For starters, both companies have been spending money on marketing intended to set itself apart from the other. It will now naturally be able to spend less to knock its sister company. Real estate professionals will also be less likely to resist the urge to become a premium agent with one or both platforms. 

2. The cure for "priced for perfection" is to exceed perfection
Zillow has been burning shorts in its publicly traded tenure because naysayers mistake a stock that is priced for perfection for one that is trading close to its valuation ceiling.

That's not exactly true. Ceilings move. Companies raise the bar.

Zillow has routinely beaten Wall Street's profit targets by a wide margin. Just last week it fell short on the bottom line -- a rare occurrence for Zillow -- but it still boosted its revenue and EBITDA margin guidance for all of 2014. 

Zillow's stock isn't cheap, trading for more than 100 times even next year's projected profitability. However, that figure is a moving target. Analysts see Zillow's profitability more than doubling to $0.38 a share, and more than doubling again next year to $0.93 a share.

Three months ago, those per-share forecasts respectively stood at $0.29 and $0.85. In other words, a stock's state of being overvalued is based on future numbers that will change.

As long as Zillow's targets keep moving higher, as they have historically, the stock will survive, if not thrive, in its "priced for perfection" state.

3. The real estate market can continue to improve
There are signs that the once-smoking hot housing industry's recovery is starting to stabilize.

The Case-Shiller index shows that home prices slipped sequentially in June. The 0.3% dip between May and June may not seem like much, but it was the first negative showing since the start of 2012. The supply of homes for sale is also at its highest in nearly three years. 

These kind of stats may make Zillow investors nervous, but that doesn't  have to be the case.

Zillow emerged on the scene during the real estate market's collapse. Volatile market prices lead homeowners to keep tabs on the "Zestimate" value of their home's market value. Meanwhile, real estate pros in a market with a glut of properties and lack of buyer demand often rely on paying Zillow or Trulia to stand out from rival brokers. This doesn't mean Zillow will thrive in this climate. It's clearly a larger and more powerful company now that it was during the downturn. 

However, the notion that Zillow's popularity will cascade if the housing market hits another bump misunderstands the model that relies largely on real estate professionals paying up for premium access on the site that reached a record 89 million unique visitors last month.

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Rick Munarriz 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.

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