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Growth stocks have outperformed massively in 2020. Companies that have been able to produce strong revenue growth – in some cases without commensurate earnings growth – have been rewarded by investors with ever-higher valuations and share prices.

One such stock is Zillow Group (Z)(ZG), a premier growth stock that has more than quintupled off of its March low. Zillow has an enormous amount of projected growth in front of it, which has made it very popular with institutional investors such as Slate Path Capital. In this article, we’ll take a look at the company’s growth prospects and valuation to evaluate whether it is a buy or not near its highs.

Business Overview

Zillow Group was founded in 2004 in Seattle and in the 16 years since it began operations, it has grown into a $25 billion market capitalization, fueled by its own innovation and acquisitions, as well as booming property markets around the country.

Zillow operates digital real estate brands through three segments: Homes, Internet, Media & Technology, and Mortgages. Through these platforms, the company offers buying, selling, renting, and financing services for residential properties. In addition, it has a full suite of marketing software and technology solutions, as well as advertising services.

Zillow’s portfolio of brands includes the flagship Zillow, Zillow Offers, Zillow Home Loans, Trulia, and many others. Combined, these brands produce more than $3 billion in annual revenue.

Growth Prospects

Zillow has immense expectations for growth in front of it. Years of strong revenue expansion from both organic and acquisition-driven top-line growth have set the stage for what should be a very impressive growth trajectory in the years to come.

Zillow continues to see higher usage of its existing core product lines, which is driving higher revenue. In addition, it continues to expand aggressively into new lines of business, with recent additions being Zillow’s in-house licensed brokerage. Through the company’s Offers and Homes segments, it is able to bring the listing process completely in-house, making the site a one-stop-shop for all of a customer’s real estate needs. This service is only available in select markets, but over time, Zillow plans to scale it much more broadly.

This process of fully integrating anything a real estate customer needs into one place is what is driving enormous growth expectations for Zillow. Revenue is slated to be $3.3 billion this year but is expected to more than double by 2022. Following that, revenue is expected to grow at 30%+ annually for years to come, making Zillow one of the premier growth stocks in the market today.

Valuation

Of course, that growth doesn’t come cheaply, and Zillow is valued as though it has many growth opportunities in front of it. The company’s earnings are extremely low at this point, as Zillow is still very much in its growth stage. This is typical of software and growth companies in general; while they are scaling, earnings can be difficult to come by. With Zillow expected to produce a profit of just ~$0.25 per share this year, we believe valuing the stock based on the price to sales ratio is more prudent.

Zillow trades for 7.7 times this year’s revenue, and 5.3 times next year’s revenue. In the past five years, Zillow has traded between 2 and 11 times sales, as the stock’s valuation has moved around quite a bit. However, the company’s valuation has generally been around 7.5 times sales. On that basis, the stock looks fairly valued on this year’s revenue, and perhaps even cheap against 2021 and 2022 revenue estimates.

Final Thoughts

Zillow is one of the best growth stocks in the market today, but we remind investors that growth stocks that have extremely high expectations – like Zillow – can fall hard if those expectations aren’t met. We think Zillow has a very bright future in front of it, but as with any growth stock, the path to stable earnings is quite unclear and may take many years to unfold.

We see Zillow as fairly valued today and would advise investors to wait for a pullback before purchasing. Zillow pays no dividend and has essentially no earnings, so risks are higher than they would be with a stock with more stability.