Zillow Group Inc. (ZG) – Closing Short Position – +394% vs. S&P +114%

We put Zillow Group (ZG) in the Danger Zone on March 7, 2016. At the time of the report, ZG received an Unattractive rating. Our short thesis posited that, given its reliance on third-party data, the firm would not be able to effectively monetize its website. However, we did not foresee Zillow leveraging purchasing, search, and individual market data to become the leading player in the iBuying market.  

This report, along with all of our research[1], leverages our more reliable fundamental data[2] to get the truth about earnings, as shown in the Journal of Financial Economics paper, “Core Earnings: New Data and Evidence.”

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During the 5+ year holding period, ZG underperformed as a short position, rising 394% compared to a 114% gain for the S&P 500.

While the stock is down 42% from its all-time high in mid-February 2021, the firm’s strong position in the iBuying market and bullish macroeconomic trends in the housing market leave the stock more likely to rise than fall in the near-term. Our reverse discounted cash flow (DCF) model reveals the stock is still significantly overvalued, but risk/reward skews towards risk in a short position in the current market.

While the company still earns an Unattractive rating, we believe the stock no longer presents quality risk/reward and are closing this short position.

Figure 1: ZG vs. S&P 500 – Price Return – Underperforming Short Idea

Sources: New Constructs, LLC and company filings

Note: Gain/Decline performance analysis excludes transaction costs and dividends.

This article originally published on June 29, 2021.

Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

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[1] Harvard Business School features our Robo-Analyst research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.

[2] Three independent studies from respected institutions prove the superiority of our data, models, and ratings. Learn more here.

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