Zillow Group, Inc. (NASDAQ:ZG)’s 29% share price rise doesn’t quite add up

Despite an already strong run Zillow Group, Inc. (NASDAQ:ZG) shares are on a strong run, up 29% over the past thirty days. Looking back a little further, it’s encouraging to see that the stock is up 74% in the last year.

Given the significant price rally and the fact that about half of the companies in the U.S. real estate industry have price-to-sales (or “P/S”) ratios below 2.3x, you could consider Zillow Group as a stock Consider one that you should avoid altogether with its 8.5x P/S ratio. However, the P/S may be quite high for a reason and further research is needed to determine whether it is justified.

Check out our latest analysis for Zillow Group

How has Zillow Group performed recently?

Zillow Group could be doing better, as its revenue growth has been slower than most other companies recently. It is possible that the market is expecting a trend reversal in future sales development, which will lead to an increase in the price/performance ratio. If not, existing shareholders may be very concerned about the sustainability of the share price.

If you want to see what analysts are predicting for the future, you should check out our free Report on Zillow Group.

What do sales growth metrics tell us about the high P/E ratio?

Zillow Group’s P/E ratio would be typical of a company that is expected to have very strong growth and, more importantly, perform significantly better than the industry.

If we review the last year of revenue growth, the company recorded a significant increase of 13%. However, this wasn’t enough, as the last three-year period saw an unpleasant overall sales decline of 9.6%. Therefore, it’s fair to say that revenue growth has been undesirable for the company recently.

As for the outlook, analysts covering the company expect it to generate growth of 14% per year over the next three years. This is likely to be similar to the 12% annual growth forecast for the entire industry.

With this in mind, it’s strange that Zillow Group’s P/S is higher than the majority of other companies. It appears that most investors are ignoring the more average growth expectations and are willing to pay for exposure to the stock. These shareholders may face disappointment if the P/E ratio falls to a level more in line with its growth prospects.

What does Zillow Group’s P/E ratio mean for investors?

Zillow Group’s P/E ratio has risen nicely over the last month thanks to a handy increase in its share price. While the price-to-sales ratio shouldn’t be the deciding factor in whether or not you buy a stock, it is still a very meaningful barometer of sales expectations.

With Zillow Group’s revenue expected to grow in line with the broader industry, it appears that it is currently trading at a higher P/E than expected. The fact that the revenue numbers aren’t exciting the world makes us doubt that the company’s elevated P/E ratio can be sustainable in the long term. This puts shareholders’ investments at risk and potential investors risk paying an unnecessary premium.

The company’s balance sheet is another important area for risk analysis. Our free Zillow Group’s financial statement analysis with six simple checks allows you to identify any risks that could be a problem.

If companies with a history of solid earnings growth are right for youmaybe you would like to see this free Collection of other companies with strong earnings growth and low P/E ratios.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.