Zillow Stock Skids 4.5% After FTC Lawsuit — Is It Still A Buy Now?

Zillow (Nasdaq: ZG) shares fell 4.3% on Wednesday after the Federal Trade Commission (FTC) filed an antitrust lawsuit against the company and Rocket Companies' (NYSE: RKT) subsidiary Redfin, alleging that the real estate platforms entered into an unlawful agreement to suppress competition in the online rental housing advertising market. Rocket shares fell 3% during after-hours trading.

The FTC complaint highlighted a $100 million (£74 million) agreement between the companies, executed in February, under which Redfin would terminate its contracts with advertising customers to stop competing in the advertising market for multifamily properties. The agreement also required Redfin to syndicate only Zillow rental listings, giving the latter exclusive control over multifamily rental listings on Redfin's platforms. The complaint claims Redfin also downsized its workforce by hundreds of employees after the deal, some of whom were then hired by Zillow.

The FTC noted that Zillow and Redfin manage two of the biggest networks of rental internet listing services. As a result of the agreement between the companies, the regulator argued that renters and property managers could face higher prices, fewer options, and poor service.

'Paying off a competitor to stop competing against you is a violation of federal antitrust laws,' said Daniel Guarnera, director of the FTC's Bureau of Competition. 'Zillow paid millions of dollars to eliminate Redfin as an independent competitor in an already concentrated advertising market—one that's critical for renters, property managers, and the health of the overall U.S. housing market.'

'While we believe the Zillow partnership was slightly accretive for Redfin since Redfin's rentals business was previously unprofitable, we do not believe Redfin's rentals business is viewed as a significant source of financial or strategic value in the context of Rocket's broader story,' KBW analyst Ryan Tomasello wrote in a Tuesday report.

But does this lawsuit change the perception of Zillow's business? The stock has a 'moderate buy' consensus rating according to a survey of analysts compiled by TipRanks. Meanwhile, the average 12-month stock price target is $90.14 (£66.78), implying a 20% upside from current trading levels.

Zillow's shares could be deemed as volatile as it had 12 stock moves greater than 5% just in the past one year. Considering this data point, Wednesday's stock price move could mean that the market views the lawsuit as meaningful but not a development that would fundamentally change its perception of the business.

The Zillow stock has gained around 0.5% year-to-date, but at $71.18 (£52.74) per share, it continues to trade much below its 52-week high of $86.76 (£64.28). However, the stock price has declined by over 33% in the past five years, meaning that Investors who purchased $1,000 (£740) worth of the stock back then would now be looking at an investment worth $660 (£488).

Meanwhile, Rocket had a consensus rating of 'hold,' according to analysts polled by TipRanks. They have a 12-month average stock price target of $13.83 (£10.25), implying a downside risk of over 25% from current trading levels.

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