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

• • • Zillow Group, Inc. (ZG:USA)currently trades near historical highs relative to UAFRS-based (Uniform) Earnings, with a 29.6x 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 just maintain profitability at current levels
    • Specifically, management may lack confidence in their ability to leverage deep data to position themselves favorably in their business expansion, and may have concerns about their ability to ensure that a customer gets an agent on the phone when they want an agent on the phone in their Premier Agent business. Additionally, they may lack confidence in their claim that the unit economics of new homes won’t change very much as they buy more homes, as labor costs should be largely fixed, and may have concerns about the transaction costs associated with their home sales. That said, market expectations are for Uniform ROA to fall to levels not seen since before 2011. At these valuations, should the firm maintain Uniform ROA at current levels, equity upside is likely warranted