Zillow Group, Inc. Class C

Executive Summary

SELL, Low conviction. Rated SELL, Low conviction. Zillow is putting up solid operating execution, with 18% Q1 revenue growth, a reaffirmed mid-teens FY26 growth outlook, and visible share gains in Rentals and Mortgages despite a flat housing market. The problem is price versus earnings power: at $32.29, the stock still trades at 123.81x P/E and above peers on P/S 2.82x versus 2.2x, while the engine's $16.58 target implies -48.7% downside even after a -65.6% collapse from the 52-week high.

Investment Thesis

Zillow is running the business better than the stock action implies, but the stock is still too expensive for what the business actually earns. FY2025 revenue reached $2.6B, up 11.3%, and Q1 2026 accelerated to 18% growth with revenue near the high end of outlook. Rentals grew 42%, Mortgages 56%, and origination volume 96%, all while management assumes the housing market stays flat. Those are not the numbers of a broken franchise.

The issue is that the current price still demands a much stronger earnings model than Zillow has proven. FY2025 EPS was only $0.10, down 41.7%, operating margin was still -7.0%, and net margin -3.5%. Against that, investors are paying 123.81x earnings and 2.82x sales, both above peers. The market is effectively underwriting a sharp margin ramp from Enhanced Markets, AI-assisted conversion, and a stronger mix from Rentals and Mortgages. That can happen, but it is not yet visible enough in reported GAAP profitability to support the present multiple.

The case depends on three things. First, Rentals must keep compounding near the guided ~30% rate and remain the cleaner secular grower inside the portfolio. Second, Enhanced Markets needs to move from 49% of connections toward 75%+ without damaging customer economics. Third, management has to deliver the promised 2H26 EBITDA margin expansion after absorbing $20M of legal expense and ~$16M of launch advertising in Q2. The company has earned some benefit of the doubt on execution, with 8 straight EPS beats and a credible history of hitting operating milestones, but not enough to overcome valuation.

The stock setup is tricky because it is already down 65.6% from the 52-week high and 41.1% below the 200-day average. That creates squeeze risk into any clean quarter, especially with 6.91% short interest. But a sharp drawdown does not by itself make a stock cheap. At $32.29, the market is still paying for tomorrow's margin structure before it is securely in hand. That keeps the stance at SELL, with low conviction because execution is genuinely improving even as valuation still looks wrong.

Key Metrics

Financial Strength

The balance sheet is fine. Zillow runs with modest leverage, debt/equity 0.10 and debt/EBITDA 1.28, plus a 2.29 current ratio, so solvency is not the concern. The more important financial question is conversion from revenue growth into durable earnings: FCF of $0.2B is healthy, and EBITDA margins are moving the right way, but GAAP profitability remains weak with -7.0% operating margin and -3.5% net margin in FY2025. This is a business with liquidity and strategic flexibility, but not yet one with fully proven normalized earnings power.

Competitive Position

Zillow's moat is its consumer traffic, brand habit, and two-sided marketplace density between home shoppers, agents, landlords, and mortgage providers. That scale is showing up in better conversion and connection rates, especially as Enhanced Markets reached 49% of connections and Preview expanded from 5 to 60+ brokerages in roughly seven weeks. The moat is durable in the near term because audience scale and data improve lead routing and monetization, but over 3-5 years AI-native search and workflow tools could chip away at portal-level advantage if Zillow does not remain the highest-conversion destination.

Management & Guidance

Management's current guide is straightforward and reasonably credible. For Q2, Zillow expects $750M-$765M of revenue and $150M-$165M of EBITDA, with the midpoint implying about 16% YoY growth, and management reaffirmed FY26 mid-teens total revenue growth, ~30% Rentals growth, lower SBC by more than 15%, and meaningful margin expansion in 2H26. That guidance deserves some respect because the company has posted 8 straight EPS beats and the latest quarter came in near the high end of revenue outlook and above EBITDA outlook. The main caveat is that part of the margin story is back-half weighted, so August results need to show that Q2 pressure from $20M legal expense and ~$16M of ad spend is truly temporary rather than the start of a higher-cost base.

Segment Analysis

• Total company ($2.6B FY2025 revenue): Revenue grew 11.3% YoY in FY2025, with Q1 2026 growth accelerating to 18% despite a flat housing market.
• Rentals (Not disclosed in provided data): The strongest disclosed segment trend, with Q1 revenue up 42% YoY, multifamily up 57%, property count up 38%, and FY26 growth guided at ~30%.
• Mortgages (Not disclosed in provided data): A major swing factor, with Q1 revenue up 56% YoY and origination volume up 96%, showing Zillow can grow even with housing turnover flat.
• Residential (Not disclosed in provided data): Still the core transaction-linked exposure, but Q2 growth is guided only mid-single digits, reflecting agent sentiment and pricing-product softness.
• Geography (Primarily U.S.): The thesis is tied to U.S. housing activity, mortgage conditions, and portal monetization rather than international diversification.

Capital Allocation

Capital allocation has been aggressive and shareholder-friendly, though arguably pro-cyclical given valuation. Zillow generated $0.2B of FCF in FY2025, spent essentially $0.0B on capex, and repurchased $0.6B of stock, including $626M in Q1 2026 alone, reducing diluted shares to 240M. There is no dividend, and leverage remains modest with debt/EBITDA 1.28, so the issue is not balance-sheet stress but whether buybacks at this valuation create value.

Management Execution & Track Record

Management has earned more credibility than the stock's recent collapse suggests. On the 2024 Q2 call, management said, "We're on track to meet our expectations for 2024 to deliver double-digit revenue growth and modestly expand our EBITDA margins," and the company has since delivered FY2025 revenue growth of 11.3% while improving operating margin to -7.0% from -8.8%. The 2024 playbook around Enhanced Markets also progressed, from 19 markets then and a goal of 40 by year-end, to 49% of connections today and a stated path toward 75%+, which shows the strategy scaled rather than being abandoned. The beat-and-raise pattern also matters: Zillow has posted 8 straight EPS beats, and in 2026 Q1 management said, "We delivered revenue near the high end of our outlook range and EBITDA above our outlook, putting us on track toward achieving our full year goals." The miss versus the older ambition is that GAAP profitability remains weak, with FY2025 EPS only $0.10 and net margin -3.5%, so execution has been solid operationally but not yet strong enough to justify a premium earnings multiple.

Positioning & Flows

Ownership is concentrated, with the top three institutions holding 61.2%, which can support stability but also means fewer natural incremental buyers if fundamentals disappoint. Short interest is meaningful but not extreme at 6.91%, or 14.5M shares, with 3.4 days-to-cover, so the setup allows for squeezes around earnings but does not signal a crowded short. Options positioning is less supportive, with a negative near-term GEX regime and a zero-gamma level of $32.82, just above spot, which can amplify volatility rather than damp it.

Bull Case

• Operating execution has been consistently ahead of Street numbers, with 8 straight quarterly EPS beats from 2024-02-13 through 2026-05-06, including +23.3% in the latest quarter.
• The business is gaining share in weak end markets: Q1 revenue grew 18% YoY while management said housing is expected to stay "effectively flat," Rentals grew 42%, and Mortgages grew 56% with 96% origination growth.
• Margin structure is improving, even if still subscale on GAAP terms: FY2025 operating margin improved to -7.0% from -8.8%, Q1 EBITDA margin reached 16.8%, and stock-based compensation is expected to decline more than 15% YoY in FY26.
• The balance sheet and cash generation are not the problem: debt/equity is 0.10, debt/EBITDA 1.28, current ratio 2.29, and FY2025 FCF was $0.2B.

Bear Case

• Earnings power is still thin relative to valuation: FY2025 EPS was only $0.10, down 41.7%, yet the stock trades at 123.81x P/E and 2.82x sales.
• Residential is decelerating in the near term, with management guiding Q2 residential growth only in the mid-single digits as agent sentiment and pricing product softness weigh on results.
• Near-term margins face deliberate pressure: Q2 includes a $20M legal expense headwind and roughly $16M of extra advertising for product launches, pulling EBITDA guidance to $150M-$165M.
• Event risk has increased: multiple securities class-action and fraud-investigation notices surfaced over the last several days, and legal costs already impacted the quarter by $11M in Q1 and are expected to be $20M in Q2.

Valuation & Price Target

Engine price target $16.58 (-48.7% vs current), Low confidence.

• P/E Multiple: $3.2 (7% weight)
• PEG (growth-adjusted): $4.41 (20% weight)
• P/S Multiple: $20.88 (20% weight)
• Quality-adjusted: $32.55 (20% weight)
• DCF: $2.29 (5% weight)

The rating stays aligned with the quant baseline at SELL, though for a narrower reason than a pure backward-looking screen. The quant engine's $16.58 target, with Low confidence, is directionally persuasive because even after a -65.6% drop from the high, the stock still trades at 123.81x P/E and 2.82x P/S, above the 17.1x peer P/E average and 2.2x peer P/S average. That said, the low confidence is appropriate because Zillow's current fundamentals are improving faster than trailing FY2025 numbers imply: Q1 revenue grew 18%, Q1 EBITDA margin hit 16.8%, and FY26 revenue is still guided to grow in the mid-teens. Sell-side consensus is a low-signal Strong Buy based on only 2 firms, and that does not outweigh the mismatch between valuation and current earnings power. If anything, the divergence highlights that the debate is about how much to pay for forward execution, not whether execution is improving.

Risk Assessment

Risk score 54/100 (Moderate). The biggest risk to a short or underweight is that Zillow converts its current mid-teens FY26 revenue growth into sustained margin expansion, which would make today's 123.81x trailing P/E look less relevant if EBITDA scales materially in 2027.

The Bottom Line

Z rates SELL, Low conviction. The business is executing better than the macro, and management has built a credible case for continued growth in Rentals, Mortgages, and Enhanced Markets. But the stock still prices in much more earnings power than Zillow has actually delivered, with 123.81x P/E against negative operating margins and a quant base value of $16.58. A move to HOLD would require clear evidence that 2H26 margin expansion is arriving on schedule and that forward earnings power is catching up to the valuation. A move to BUY would require both that proof and a materially lower entry price, or a much stronger profitability inflection than management has yet shown.