Zillow Inc (NASDAQ:Z) stock has soared by more than 50% already this year, but Canaccord Genuity analysts believe shares will go even higher. In a report dated June 15, 2014, analysts Michael Graham and Marla Ripps said they bumped up their price target for the company from $115 to $130 per share.
Zillow's business remains strong
The Canaccord Geunity team said they hosted investor meetings with members of Zillow Inc (NASDAQ:Z) management, including Chief Financial Officer Chad Cohen, Chief Revenue Officer Greg Schwartz, and Mortgage Head Erin Lantz. The analysts think the online real estate company's core premier agent business is still very strong and that its mortgages segment is "nicely evolving." They also think Zillow's rentals market is "making progress towards the longer term."
Graham and Ripps also noted that short interest in Zillow Inc (NASDAQ:Z) is extremely high right now, at about 34% of the float. The analysts also said "seemingly highly-convicted shareholders" have a significant portion of the company's stock, with about 42% of the shares.
Zillow's Premier Agent ARPA expected to outperform
The Canaccord Genuity analysts report that they were surprised by "how early the online real estate vertical seems to be in its development." They said that as of the first quarter, Zillow Inc (NASDAQ:Z) had more than 675,000 agent profiles, with less than 10% of them (around 53,000) having decided to advertise on the website.
The analysts believe that there are about 350,000 "thought-leading, high-producing agents" and that less than 25% of them currently are on Zillow Inc (NASDAQ:Z) or Trulia Inc (NYSE:TRLA). They also think that at this point, we could be seeing "the first curve in an 'S-curve' adoption cycle," which they believe might even speed up to about 80% penetration of those top agents very quickly.
Other possible upside for Zillow
Currently they estimate that Zillow Inc (NASDAQ:Z) captures only about 2% of real estate agent advertising budgets. They believe the site impacts about 4% of available transaction sides. With about 5.5 million real estate transactions in the U.S. every year, there are about 11 million buys and sells. They estimate that approximately 4 million of them are return business and referrals, which probably won't be impacted by advertising.
In Zillow Inc (NASDAQ:Z)'s first quarter results, the Canaccord Genuity analysts said they were surprised that the upside came from average revenue per account rather than the number of agents. Going forward, they expect more dynamic pricing from Zillow, resulting in greater upside, and an auction system that's similar to Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)'s AdWords. They don't think this will happen this year though.
A merger for Zillow and Trulia?
The Canaccord Genuity team reports that public filings show that only six shareholders own 52% of competitor Trulia Inc (NYSE:TRLA) stock and that the same six shareholders own about 42% of Zillow Inc (NASDAQ:Z) shares. They said that in the past in Australia and the U.K., where the Internet real estate market preceded that of the U.S., consolidation resulted in "strong pricing power." They think if Zillow and Trulia merge, the new combined company would be able to grow rapidly and raise prices over time. They suggest that a deal between the two companies "could be quite accretive to Zillow even before factoring in any revenue synergies from pricing power."
However, they don't think a merger is that likely in the near term because they say it looks like Zillow Inc (NASDAQ:Z) management "strongly focused on execution" right now.