ZG – Although management sentiment suggests near-term returns may be muted, overly bearish market expectations suggest long-term upside remains warranted

• Zillow Group, Inc. (ZG:USA)currently trades near historical highs relative to UAFRS-based (Uniform) Earnings, with a 37.1x Uniform P/E. However, even at these levels, the market is pricing in fairly bearish expectations for the firm. Although negative management sentiment suggests near-term upside may be limited, these overly-bearish expectations are likely to support longer-term outperformance should ZG simply maintain profitability at current levels
• Specifically, management may lack confidence in the scalability of their current buyback model and in their cost per lead rental business model, especially due to the recent softness in rental traffic. Furthermore, they may be exaggerating the unit economics benefits of longer closing times and the potential home buying and selling volume in their Zillow Offers business. Additionally, they may lack confidence in their decision to focus on digitizing rental transactions to lead the race in the digital rentals market, rather than on near term revenue generating initiatives
• That said, market expectations are for Uniform ROA to fall to levels not seen since before 2011. At these valuations, should the firm simply maintain Uniform ROA at current levels, equity upside is likely warranted