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Zillow Group (ZG) Looks Promising Right Now: Should You Hold?

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Shares of Zillow Group (ZG - Free Report) have gained 7.7% in the past one year, against the industry’s decline of 2.8%. The company’s price performance was driven by an impressive earnings surprise history. It surpassed earnings estimates in each of the trailing four quarters, recording an average beat of 18.2%.

Zillow Group has reported modest second-quarter fiscal 2018 numbers. Non-GAAP earnings of 13 cents per share came ahead of the Zacks Consensus Estimate of 9 cents per share. Further, the figure increased 225% from the year-ago figure of 4 cents per share.

Total revenues increased 21.9% year over year to $325.2 million, which almost matched the Zacks Consensus Estimate of $325 million. The figure came within management’s guided range of $322-$327 million.

Strong improvement of the company’s Premier Agent Business primarily drove year-over-year revenue growth. New construction marketplaces and Rentals also aided growth. Zillow Group is striving to increase its audience size and improving consumer engagement via advertising and other related marketing initiatives.

The company has a long-term EPS growth rate of 5%.

Growth Drivers

A new lead distribution and validation process is currently under testing aimed at improving the company’s Premier Agent business. Additionally, participating in the Zillow Instant Offers marketplace is aimed at capitalizing on the business opportunities in the Home segment.

The company’s application that allows agents to create 3D home tours, aiding buyers narrow down their searches before a personal visit, is another positive.

Zillow is working toward growth of emerging marketplaces. With the combination of machine learning and personalization, the company anticipates to align consumer interest with the listed properties. Expanding footprint in new cities and cities where the company has a significant market presence, including the likes of Phoenix, Denver, Irvine, Cincinnati, Lincoln Nebraska, will positively impact the top line.

The company regularly adds new features to bolster experience for property managers and consumers. Rental Inforum is aimed at making property managers better understand the preferences of consumers. “My Agent” can detect when a premier agent is actively engaged in discussions with a consumer and replaces the agent list with a contact box featuring only the chosen agent.

Furthermore, Zillow also announced that it has entered into a definitive agreement to acquire Mortgage Lenders of America, L.L.C.

Strong Liquidity

In July, the company had raised approximately $750 million through the pricing of convertible senior notes and Class C capital stock. Post the offering, the company now has over $1.5 billion of cash and investments, up from $822.9 million reported in the previous quarter.

We believe that the company has a strong balance sheet, which will help it to capitalize on investment opportunities and pursue strategic acquisitions, further improving growth prospects. Moreover, we believe that the senior notes offering will bring down the company’s cost of capital, consequently strengthening its balance sheet and supporting growth.

Risk Remains

Nevertheless, stiff competition, increasing mortgage interest rates and higher advertising spend are major headwinds. Moreover, spending in product enhancements is likely to hinder margin growth at least in the near term.

To Conclude

A successful investor understands the importance of retaining well-performing stocks in the portfolio at the right time. Indicators of a stock's bullish run include a rise in share price and strong fundamentals. Though there may be some concerns regarding the stock but they are transitory in nature. Consequently, considering these factors, investors are suggested to grasp on to this Zacks Rank #3 (Hold) stock.

Key Picks

Some better-ranked technology stocks include Salesforce.com Inc (CRM - Free Report) , NetApp, Inc. (NTAP - Free Report) and Paycom Software, Inc. (PAYC - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Salesforce.com, NetApp and Paycom Software is currently projected to be 25%, 14.1% and 25.5%, respectively.

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