Zillow under pressure as short seller sees risk of 60% drop

Shares of Zillow (Z) are under pressure on Tuesday following a short report by Spruce Point claiming the company is facing up to 40%-60% long-term downside risk, representing a share price of approximately $23-$35. The report calls Zillow a “mature business under increasing pressures” and cites a lack of innovation. Jefferies, however, argued on Monday that Zillow’s product innovations have “culminated into an ecosystem of complimentary services that should enhance monetization capabilities and increase penetration of real estate transaction TAM.”

SHORT REPORT: Spruce Point Capital Management issued a report entitled “Zillow’s Sinking Foundation” that outlines why the firm believes shares of Zillow Group face up to 40% to 60% long-term downside risk, or approximately $23.00-$35.00 per share. Spruce Point believes Zillow is a “mature business under increasing pressures with recent failed growth initiatives that illustrate management is incapable of innovating and delivering on goals as Zillow quietly retracts 2025 revenue targets,” the report reads.

Spruce Point says Zillow’s core business model is under pressure from declining web traffic and growing industry litigation and regulatory risks that are poised to disrupt the real estate commission structure. The short seller thinks the ongoing litigation involving the NAR and other MLS operators will have a significant impact on Zillow’s core Premier Agent business. Considering the verdict in the NAR case combined with the DOJ’s statements in the MLS PIN case, we believe it is more than likely that the NAR and other MLS operators will no longer engage in cooperative compensation to participate in their respective MLS.

Additionally, Spruce Point notes that CoStar Group (CSGP), which bought Homes.com in April 2021, recently announced it is investing over $1B to market the website, with its slate of four Super Bowl commercials effectively being the launch party. CoStar management describes it as “the biggest marketing campaign in real estate history.” For the first time, Spruce believes Zillow will face a well-capitalized competitor.

Zillow did not immediately respond to The Fly’s request for comment.

TOP SMID PICK: On the bullish side, Jefferies raised the firm’s price target on Zillow to $75 from $70 on Monday, keeping a Buy rating on the shares and naming the stock as the firm’s Top Pick among its small to midcap coverage in the space. Zillow’s product innovations have “culminated into an ecosystem of complimentary services that should enhance monetization capabilities and increase penetration” of the real estate transaction total addressable market, the firm argued. Jefferies added that any potential impact from the ongoing commission lawsuits is not incorporated into its analysis, though it sees multiple paths to maintaining the status quo. In particular, the firm called out mortgage companies allowing homebuyers to finance agent commissions.

PRICE ACTION: In Tuesday morning trading, shares of Zillow have dropped over 3% to $55.42.