Back on April 14th, Zillow (Z) announced fiscal 2015 guidance that was below consensus and prior guidance:
Shares of Zillow were down almost 13% following the pre-announcement, making new 52 week lows, before recovering and closing down only one percent on April 14th:
That price action on April 14th was fairly epic, a text book spike bottom that has held. On a longer term basis though, the low of that day went back and tested prior support, while the stock seems to be finding some resistance at prior support of $100:
Event: Zillow is scheduled to report their Q1 results tomorrow after the close. The options market is implying about an 7.5% one day move (the May15th weekly 97.50 straddle is offered at about $8, if you bought that you would need a move above $105.50, or below $89.50 by Friday’s close to make money) vs the 4 qtr avg move of about 3.25%.
Price Action: The stock is up 5.5% today on an upgrade from Suntrust’s Internet analyst Bob Peck. Here was a quick summary of the upgrade from a note to clients:
Upgrading to Buy. While we have been Neutral on Z throughout its merger process with Trulia, we now believe that expectations have been lowered sufficiently that Z can return to beat & raise type quarters. Further, we think the long-term opportunity from the secular shift of information and discovery online (mobile) and Z’s dominant market position are currently being under appreciated by the Street. We think Z can achieve ~$350M in EBITDA in FY2017 and has several long-term drivers. We upgrade our rating to Buy with a price target of $130 (~40% potential upside) based on a 24x multiple our 2017E EBITDA and our Central Tendency of Value Methodology.
What’s interesting to me about this call is that Peck has been on the sidelines for a year, as most other analysts have (there are only 6 Buys ratings and 12 Holds ratings), but that the upgrade comes 2 days before Zillow CEO Spencer Rascoff will be a Keynote Speaker at Suntrust’s Internet conference on Wednesday in San Francisco (disclosed in Peck’s upgrade note).
Oh, and one more thing, Peck downgraded Twitter to a Hold from a Buy when the stock was $51.66 a day before their disastrous Q1 results that have sent the stock down 27% since. I think you have to go with Peck on this one.[caption id="attachment_53546" align="aligncenter" width="600"] From Bloomberg[/caption]
MY VIEW: With sentiment very poor, short interest through the roof at 27%, full year guidance already out and the fact that Zillow’s CEO is speaking in front of investors at an industry conference the day after results I am hard-pressed to think that near term guidance will be that much worse than expected. But the implied move is ridiculous.
Potential Trades: Today’s 6.5% bounce makes an entry for a bullish trade a bit challenged, but if the stock were to pull back this afternoon or tomorrow it could set up interestingly to play for a modest move higher based on the technical levels we discussed above, while also looking to fade the implied move. We’ll circle back tomorrow if we see an entry level that works.