$Z Q3 Earnings Cheat Sheet

by Enis November 5, 2013 10:42 am • Commentary

Event:  Z reports its Q3 earnings today after the close.  The options market is implying about a 10.5% one day move, which is slightly below the 4 qtr avg of about 11%, but above the 8 qtr avg of about 9.5%.

Sentiment:  Wall Street analysts are not positive on the stock, with only 5 buys, 7 holds, and 2 sells, and an average 12 month price target of around $91.  Short interest remains around 25% of the float, even though the stock’s year-to-date change is +193%.  The short interest has declined for much of 2013, but it is still close to where it was a year ago, when the stock traded at less than half its current price:

Zillow short interest in total shares, Courtesy of Bloomberg
Zillow short interest in total shares, Courtesy of Bloomberg


Options Open Interest:  Open interest is slightly skewed towards puts vs. calls by a ratio of about 1.1 to 1.  However, recent activity has favored calls, with the 1 month average volume about 1.25 to 1 in favor of calls trading.  The Nov15th 100 calls and Nov15th 85 puts both have over 2k of open interest.

Price Action / Technicals:  Zillow IPO’ed in July 2011, and promptly sold off from its $60 high on IPO day.  That $60 level served as resistance earlier in 2013, but once it broke, the stock was off to the races:  

[caption id="attachment_32171" align="alignnone" width="600"]Z daily chart, Courtesy of Bloomberg Z daily chart, Courtesy of Bloomberg[/caption]

Zooming in to the last 6 months, the stock’s earnings gap on August 1st has not been filled, and that’s the area to watch on the downside ($73-$75):

[caption id="attachment_32172" align="alignnone" width="600"]Z daily, 50 day ma in pink, 200 day ma in black, Courtesy of Bloomberg Z daily, 50 day ma in pink, 200 day ma in black, Courtesy of Bloomberg[/caption]

The stock has a good chunk of resistance in the $90-$100 area on the upside, where late-comers to the party are likely to be sellers.  In short, shorts are likely buyers 10% lower, and Johnny-come-latelys are likely sellers 10% higher.

Volatility:  Zillow’s implied volatility heading in to the earnings event is near the low end compared to the past 4 earnings events, mainly due to the low recent realized volatility:

[caption id="attachment_32180" align="alignnone" width="600"]Zillow 30 day implied volatility (blue) vs. 30 day realized volatility (red), Courtesy of LiveVolPro Zillow 30 day implied volatility (blue) vs. 30 day realized volatility (red), Courtesy of LiveVolPro[/caption]

The stock has also fallen back into a technical range, as opposed to its breakout situation prior to last earnings, making a large move less likely according to options traders.

Our View:   Dan wrote extensively about Zillow in his Name That Trade post about 2 months ago, succinctly summarizing his thoughts on the company:

My quick take is there is nothing particularity special about this company, they have lots of competition in the online home sale space from the likes of Trulia, Realtor.com and Redfin.  While the company is seeing pretty impressive sales growth, expected to grow 40% a year for the next 2 years (it is rapidly decelerating), they have seen the costs of acquiring those sales to go up to almost 50% of revenue.   Aside from the user-interface this is a fairly low tech business from what I can tell.  The company relies a great deal on human sales people calling human listing agents to get their fees, not sure paying north of 20x those sales makes sense for a business that resource intensive that lacks scale.

Not much has changed since he wrote that, but the stock is down 20%, another indication of how quickly sentiment can change in these high fliers.  Without any strong fundamental backing, and little in the way of a competitive moat, we are not optimistic on this stock’s prospects in the long-term.  In the short-term, the stock still has high short interest and a concentrated investor base (top 5 investors hold about 40% of the shares), so the squeeze potential still exists.  The 3 month low around $75 is the downside level to watch, while I’d be surprised if the stock breached $90-91 on the upside.