Zillow Group (NASDAQ:Z) (NASDAQ:ZG) stock fell Wednesday after its latest results pointed to improving core profitability, but rising legal costs and the growing threat of private listing networks clouded the near-term outlook.
Needham analyst Bernie McTernan reiterated a Hold rating on the company following the company’s fourth-quarter results and first-quarter guidance released Tuesday.
He trimmed his 2026 earnings estimates by 1% and said the stock continues to face multiple moving parts that complicate the near-term story.
Margin Outlook And Earnings Power
McTernan believes that, absent legal expenses, the company would already be demonstrating a meaningful improvement in incremental margins and positioning itself to benefit from a housing market recovery, which he views as potential upside risk to his estimates. However, he cautioned that elevated legal costs and longer-term competitive pressures create uncertainty.
On earnings power, McTernan models roughly 50% incremental margins in 2025, excluding legal costs. Including those expenses, he expects incremental margins to land in the 30%–40% range for the third consecutive year.
Looking ahead to 2027, he expects earnings strength to become more visible as legal costs decline year over year. That normalization could drive incremental adjusted EBITDA margins to around 60%, returning the company to the stronger profitability profile it demonstrated prior to its iBuying expansion.
Revenue Growth And Housing Market Catalyst
McTernan also sees potential upside to revenue. His current model assumes growth slows from 16% in 2026 to 11% in 2027, but he noted that stronger topline performance would likely flow through to higher adjusted EBITDA given fixed-cost leverage.
A return of the housing market to mid-cycle levels would represent the most significant revenue catalyst, though he expects any recovery to play out gradually rather than in a sharp one-year rebound.
Private Listing Networks And Competitive Risks
On private listing networks, McTernan acknowledged management’s view that they account for less than 1% of total listings and are not materially impacting the business today.
While the company won a preliminary injunction preventing the next phase of Compass Inc.’s (NYSE:COMP) marketing strategy, he believes the battle is likely in its early stages, particularly following Compass’s recent acquisition of Anywhere Real Estate Inc. (NYSE:HOUS), which expanded its brokerage scale.
Although the immediate revenue impact appears immaterial, McTernan suggested structural uncertainty could weigh on the stock’s valuation multiple.
Quarterly Results And Guidance Shortfall
Fourth-quarter adjusted EBITDA came in 2% below McTernan’s estimates, driven by weaker margins. First-quarter guidance landed 5% below his projections, primarily due to higher costs, including legal expenses. Still, he reduced his full-year 2026 estimates by only 1%, reflecting improved expectations for the second half of 2026.
Overall, McTernan sees improving operating leverage and housing recovery as upside drivers, but believes legal costs and evolving competitive dynamics justify a cautious stance for now.
Z Price Action: Zillow shares were down 18.11% at $44.80 at the time of publication on Wednesday. The stock is trading at a new 52-week low, according to Benzinga Pro data.
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