Investment Thesis
Zillow demonstrates solid revenue growth (+15.5% YoY) and strong free cash flow generation ($166M FCF, 23.4% margin) with a conservative balance sheet, but is hampered by severe profitability inefficiency—ROE and ROA of only 1%/0.9% despite 73% gross margins indicate substantial operating expense drag that limits shareholder value creation. The disconnect between strong gross margins and weak net income suggests operational leverage is not being captured effectively.
Strengths
- Strong revenue growth at 15.5% YoY with healthy 73.3% gross margin indicating pricing power
- Excellent free cash flow generation ($166M FCF) that substantially exceeds net income ($46M), demonstrating cash generation capability
- Conservative capital structure with low debt/equity ratio (0.30x), strong interest coverage (9.0x), and solid liquidity (2.29x current ratio)
Risks
- Critical profitability weakness with ROE of 1.0% and ROA of 0.9%—among the lowest for any viable business, signaling poor capital efficiency
- Large profitability margin compression from 73.3% gross margin to just 6.5% net margin indicates excessive operating and SG&A expenses consuming most gross profit
- Material operating expense ratio relative to revenue suggests the business model may not scale efficiently despite revenue growth
Key Metrics to Watch
- Operating margin trend—critical to see if company can improve margin conversion from 73.3% gross to higher operating margins
- Return on Equity and Return on Assets—these must improve significantly from current 1%/0.9% levels to justify investment
- Operating expense ratio and SG&A as percentage of revenue to identify if cost structure can scale with growth
Financial Metrics
Revenue
708.0M
Net Income
46.0M
EPS (Diluted)
$0.19
Free Cash Flow
166.0M
Total Assets
5.2B
Cash
678.0M
Profitability Ratios
Gross Margin
73.3%
Operating Margin
5.1%
Net Margin
6.5%
ROE
1.0%
ROA
0.9%
FCF Margin
23.4%
Balance Sheet & Liquidity
Current Ratio
2.29x
Quick Ratio
2.29x
Debt/Equity
0.30x
Debt/Assets
15.7%
Interest Coverage
9.00x
Long-term Debt
1.3B
Disclaimer: This analysis is generated by AI based on publicly available SEC EDGAR filings.
It does not include stock price data and should not be considered financial advice.
All fundamental data is sourced from SEC public domain filings.
Always conduct your own research before making investment decisions.
Data Source: SEC EDGAR |
Analysis Date: 2026-05-08T13:10:36.585244 |
Data as of: 2026-03-31 |
Powered by Claude AI