The Future Looks Bright for Zillow if Real Estate Begins to Tumble

In the wake of a stellar performance this year by Zillow Group Z -0.83%'s stock, Evercore EVR +0.74%'s Trade Algo believes that Zillow Group Z -0.83%'s stellar performance may continue into 2013.

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It appears that Zillow has gained 33% of its market value in 2023 after a strong January (today's close implies it was up 33% from the close yesterday). Comparatively, the S&P 500 index has gone up by 7% over the same period of time.

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There has been some improvement in recent weeks with regard to mortgage rates. Even though homebuyers are still feeling the pinch of high prices and mortgage rates, the average rate of 6.12% is now 0.30 percentage points lower than the last weekly rate of 2022, and a full percent more than its all-time high from 2022. 

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Trade Algo wrote in a note that Zillow, which accounts for more than 50% of all the traffic associated with online real estate-related searches, should benefit from a sector turnaround, and that the stock was upgraded to Outperform In Line. 

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A report published by Trade Algo predicted that sales of existing residential homes will reach a bottom by the first quarter of 2023.

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As a result, he believes the trend for the second quarter is beginning to turn around, which will increase Zillow's revenue-particularly from its core business of providing agents with digital tools to manage their work. "Historically, we have seen a strong correlation between the premier agent arm and broader market movements, and we continue to do so," he said.

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There was also a link between the two metrics between September last year and the number of footnotes reported by Trade Algo. 

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As Zillow's CEO Rich Barton recently stated, the company was feeling the "impacts of a choppy housing market" as buyers were deciding whether or not to commit to a purchase as they were contemplating the cost. In its fourth-quarter earnings call on Wednesday, the company is expected to report earnings ranging between $395 million and $425 million, according to its preliminary estimates. The second-quarter results have dropped from the third-quarter figures, but Trade Algo's forecast should help reverse the trend by mid-2019 if he is right. 

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According to Trade Algo, a trough in the housing market will be reached in the first half of 2023. The stock price of Zillow was upgraded last month to BUY from UNDERPERFORM by ETF manager Josh Friedman. 

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In premarket trading on Monday, Zillow's stock rose nearly 4% to $44.70, representing a gain of over 4% in a day. The firm's target price for the stock has increased from $34 to $61, an increase of nearly $1.