Zillow (Z) stock has seen better days. Sadly, it’s unlikely to see them again anytime soon.
Shares of Z stock fell as much as 7% today after The Wall Street Journal reported that Zillow’s Chief Financial Officer, Chad Cohen, would be abruptly resigning from the company to “pursue other business interests.” He will step down Aug. 7.
Zillow hasn’t caught any breaks in 2015, and the stock is now down more than 25% this year after today’s stumble. Sometimes a swift fall from grace like the one Z stock is experiencing now can attract investors looking to make a quick profit on the “inevitable” upcoming bounce.
But there won’t be a bounce.
Contrarians, value investors, bargain hunters, swing traders — call them whatever you like, they need to stay far away from this garbage heap. And so does everyone else.
Here’s why.
Zillow Stock Faces a Reckoning
There’s an old stock market saying: “In the short run, the stock market is a popularity contest. In the long run, it’s a weighing machine.” Zillow stock is finally stepping on the scales this year, and it’s coming up light.
I’ve been cautioning investors to dump Z stock since mid-April, when shares traded above $91 per share. That’s when news broke that Move Inc, owner of Realtor.com and a subsidiary of News Corp (NWSA), was going after Zillow for allegedly stealing entire listing databases from Move and illegally hiring an ex-Move employee.
The back-and-forth litigation is still ongoing, although the scales seem to be tipping in Move’s favor at the moment, considering an injunction against Zillow that was granted last week in this case.
Reading between the lines, CFO Chad Cohen’s departure may be in response to adverse changes in the legal tide. After all, Move contends that it was already making moves to buy Zillow rival Trulia, when a former Move employee tipped off Zillow to the idea and Zillow swooped in instead.
Cohen, who has been at Zillow since 2006, has overseen nine acquisitions, and was leading the finance arm when Zillow acquired Trulia earlier this year. But this whole legal mess is just one of the reasons to avoid Z stock.
As I noted after Zillow’s last earnings report in May, I am utterly unimpressed with Zillow’s financial results. Although Z stock beat on earnings, it missed revenue expectations by a mile. Analysts now expect Zillow to lose a non-GAAP 7 cents per share in fiscal 2015.
Although Wall Street currently expects Zillow to be able to swing to a non-GAAP profit in 2016, the forward P/E multiple on Z stock is still a sky-high 51.
On top of that, there are a few problems with Zillow’s business on a qualitative level: It can no longer pull listing data from NWSA-owned ListHub, which won’t help the accuracy of its famous “Zestimates.” Zillow CEO Spencer Rascoff has openly conceded that the median error rate of its Zestimates is about 8%.
The bottom line: Don’t waste your time with Z stock — it’s more trouble than it’s worth.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
