Zillow's stock has recently experienced a significant decline, reaching a new 52-week low. This downturn is largely attributed to ongoing legal challenges and increased competition within the real estate market. An analyst report highlights that elevated legal costs are hindering the company's ability to capitalize on an improving housing market, even as its core profitability shows signs of strengthening. The company's recent quarterly results and future guidance have fallen short of expectations, primarily due to these persistent expenses. While a housing market recovery could offer future upside, the immediate outlook remains cautious given these prevailing headwinds.
Amidst these challenges, Zillow's operating leverage is showing promise, and a gradual recovery in the housing sector is anticipated to bolster its performance in the long term. However, the current landscape of legal battles and intense competition necessitates a prudent investment approach. The analyst projects a more visible earnings strength by 2027 as legal costs are expected to normalize, allowing the company to return to its previous robust profitability. This period is critical for Zillow to navigate external pressures while reinforcing its operational foundations.
Navigating Legal and Competitive Obstacles
Needham's analyst, Bernie McTernan, has reiterated a neutral stance on Zillow's stock, lowering the 2026 profit outlook by one percent. This adjustment reflects the multifaceted challenges Zillow currently faces, which are complicating its short-term financial narrative. The analyst emphasizes that without the burden of legal costs, Zillow would likely be demonstrating substantial improvements in its incremental margins, positioning itself favorably for an eventual rebound in the housing market. However, the existing legal expenditures and the intensifying competitive landscape introduce considerable uncertainty, dampening the company's immediate prospects and stock performance.
The property technology firm is contending with significant legal fees, which are projected to keep its incremental adjusted EBITDA margins within the 30%-40% range for a third consecutive year. This persistent cost factor prevents Zillow from fully realizing its operational efficiencies. Moreover, the emergence of private listing networks, though currently accounting for a small fraction of total listings, poses a structural uncertainty that could negatively influence the stock's valuation. The analyst notes that while Zillow recently secured a preliminary injunction against a rival's marketing strategy, the broader competitive battle, particularly following the rival's strategic acquisitions, is still in its nascent stages, suggesting continued pressure on Zillow's market position.
Financial Performance and Future Growth Trajectory
In the recent fourth quarter, Zillow's adjusted EBITDA slightly underperformed the analyst's forecast by two percent, primarily due to weaker margin performance. The subsequent first-quarter guidance further missed projections by five percent, largely driven by an escalation in operational and legal expenses. Despite these immediate shortfalls, the analyst has only marginally trimmed the full-year 2026 estimates by one percent, reflecting an optimistic revision for the latter half of that year. This indicates an expectation that, while current challenges persist, the company's underlying business health and future prospects remain solid over a longer horizon.
Looking ahead, the analyst forecasts that Zillow's revenue growth will temper from 16% in 2026 to 11% in 2027. Nevertheless, a stronger-than-anticipated top-line performance is expected to translate into higher adjusted EBITDA, benefiting from the company's fixed-cost leverage. The most significant catalyst for revenue acceleration is identified as a return of the housing market to its historical mid-cycle activity levels. While such a recovery is not expected to be sudden, a gradual improvement would substantially enhance Zillow's financial standing. Furthermore, a decline in legal expenses by 2027 is anticipated to significantly boost incremental adjusted EBITDA margins to approximately 60%, restoring the company's profitability to levels seen before its expansion into iBuying, thereby solidifying its long-term financial stability.