Before we consider the opportunity in Zillow (NASDAQ:Z, NASDAQ:ZG) stock, we should acknowledge the overall risk. The situation is now ablaze in the Ukraine, but the negative rhetoric is building showdowns between the U.S. and China. Wall Street knows this, and that’s why the the CBOE Volatility Index (INDEXCBOE:VIX) is near $30. With that in mind, I have mild conviction in the opportunity in ZG stock today.
Regardless of how valid your thesis for Zillow may be, in this kind of environment, you must infuse plenty of doubt into it by design. This will force an investor to not over commit all at once. On the other hand, investors who are already long ZG shares should think twice before adding to it now.
We don’t know anything new today compared to what we knew last week.
With that said, let’s consider the overall macroeconomic conditions for real estate stocks more broadly. The fundamentals for individual companies like Zillow have arguably never been better. Real estate professionals are reporting shortages in inventory. These shortages alongside record low rates are ideal for Zillow. Therefore, despite the potential for rates to rise, the company has a long runway ahead of it.
Demand should remain strong and real estate companies like Zillow are inside a booming trend. Likewise, online transactions from start to finish in this space suits its business well. You can expect Zillow to continue enjoying its first-mover advantage with this innovation to the space.
ZG Stock Is Temporarily Out Of Favor
Still, Wall Street has a lot of issues with ZG stock. This is nothing against the company, because investors have rejected the whole market. For the last few months, the sellers have not stopped punishing great stocks like Zillow. Delivering growth is no longer enough, and investors’ expectations are high.
For Zillow, the fundamental argument is easy to make, but not from a profitability standpoint. Because it still loses quite a bit of money, risk appetite for it is lacking. The profit and loss statement shows extremely strong revenue growth (up five times from 2018). The current run rate is $8.2 billion, but the losses are still a repellent to the stock.
Investors go through similar phases every few years but they will snap out of it. Therein lies the argument that’s at the heart of the thesis today. The future success of Zillow is likely, but it comes with short-term trepidation. If investors have patience, they can hold it for the long-term recovery.
I’ve just made the argument for the fundamentals, and the technicals are just as solid. When a stock falls as much as ZG has, it tends to find support at significant levels. ZG stock rallied non-stop last year but eventually completely collapsed. From its highs to these lows, it lost 80% of its value. Luckily it is falling into a range where buyers should be lurking.
The key term is “range” because it is not a hard floor, so the stock can fall further. Since no one rings bells to announce perfect entry spots, Zillow investors will have to take risks. The important part is for them to take only partial positions. They can leave room to add more later. This approach alleviates the need to be perfect now.
Alternative Approaches to Zillow Stock
In this particular situation, I would rather use options to take a position in ZG. If you’re willing to own shares now, you could sell puts, but lower instead. These are bullish trades that would you would not need a rally to win. They have limitations with the amount of money you can make, but at least they leave plenty of room for error.
Stepping out of your comfort zone is necessary when conditions are extreme. And it’s hard to find a more extreme time than now.
The economy is firing on all cylinders, so much that the Federal Reserve is starting a cool down cycle. Moreover, the White House is ramping up its combative rhetoric with China. As such, extrinsic factors are still bearing down on stocks at extremely high levels. Zillow is not immune to these headwinds; therefore, you should anticipate drama and lower your enthusiasm about it.
There are also potential technical hiccups from the charts. On the way back up, ZG stock will likely find sellers lurking around $65 per share. They have been there since 2018, February 2020 and again last month. The bulls will need a lot of conviction and help from the indices this year.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.