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Why Zillow Group Inc. Stock Is Up 44.6% in 2016

By Steve Symington – Jul 16, 2016 at 12:10PM

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The online real estate portal is up big this year. Here's what investors need to know.

Image source: Zillow Group Inc.

What: Shares of Zillow Group Inc. (ZG -0.09%) (Z) are up 44.6% so far in 2016, according to data from S&P Global Market Intelligence, driven by better-than-expected quarterly reports, as well as some positive news in the courts.

So what: Shares of Zillow jumped more than 12% the day after releasing its first-quarter 2016 results in May, which revealed that quarterly revenue grew 25% on a pro forma basis, to $186 million. That was well above the $179 million high end of Zillow's guidance and included a healthy 23% rise in marketplace sales, to $169 million. Notably within marketplace sales was a 34% increase in real estate revenue, to $152.5 million, and 65% growth from its smaller mortgages business, to $16.5 million. Meanwhile, Zillow's display revenue fell by more than a third, to $17 million. But that was again above Zillow's guidance, which called for the fledgling segment to achieve sales of $13 million to $14 million and was primarily a consequence of Zillow's decision in 2014 to begin underinvesting in display advertising to focus on its more promising marketplace segment. 

That's not to say Zillow's gains have been entirely smooth; investors who held shares at the beginning of the year saw them decline more than 30% through early February, primarily as Zillow was dragged down by the broader market's historically painful start to 2016. And though shares began to rebound following its aforementioned Q4 report that month, management warned at the time that a costly trade-secrets lawsuit from competitor Move.com was holding back valuable resources that, to borrow the words of Zillow Group CFO Kathleen Philips, "could otherwise be used to support innovation and growth, or margin expansion."

With that in mind, however, Zillow shares got yet another boost in early June, after an SEC filing revealed that it had settled that case, agreeing to pay the plaintiffs $130 million in exchange for having all sides drop their suits (and countersuits) without admitting liability, wrongdoing, or responsibility. That might not sound like a good thing, but some analysts had predicted that Zillow could end up paying as much as $500 million in such a settlement -- and that's in addition to legal fees, which were expected to be around $36 million this year alone, to support the ongoing suit.

Now what: As it stands, Zillow Group can begin plowing that extra money into further advancing its sales, marketing, and research-and-development initiatives, which should serve to help sustain its positive momentum in the quarters ahead. As Zillow continues to strive to capture as much of the estimated $12 billion real estate agents spend annually advertising their listings, and given incremental contributions from budding segments such as rentals and mortgages, I think long-term investors will continue to be happy holding Zillow Group shares.

Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). 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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Stocks Mentioned

Zillow Group (A shares) Stock Quote
Zillow Group (A shares)
ZG
$34.79 (-0.09%) $0.03
Zillow Group (C shares) Stock Quote
Zillow Group (C shares)
Z
$35.29 (%)

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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