Zillow stock rating reiterated by KBW amid FTC lawsuit over rentals partnership

The Federal Trade Commission has filed a lawsuit against Zillow and Redfin, alleging their rentals partnership unlawfully suppressed competition and seeking structural remedies that could unwind Zillow's estimated $100 million in annualized revenue and competitive gains from the deal. This action, largely unexpected by investors, comes as Zillow reported Q2 2025 revenue exceeding expectations despite an EPS miss. While Keefe, Bruyette & Woods maintained a Market Perform rating due to these legal challenges, JPMorgan raised its price target citing a solid growth outlook, with CoStar potentially emerging as a net beneficiary from the situation.

Analysis

Zillow Group (Z) faces a significant legal and financial threat following an unexpected lawsuit from the Federal Trade Commission targeting its rentals partnership with Redfin (RDFN). The FTC alleges the pact is an unlawful agreement to suppress competition and is seeking structural remedies, which could dismantle a partnership that has already contributed an estimated $100 million in annualized revenue to Zillow and improved its competitive standing against CoStar Group (CSGP). This legal challenge creates a material overhang on the stock, potentially reversing recent strategic gains. The news overshadows Zillow's mixed second-quarter 2025 results, where revenue of $655 million surpassed expectations of $647.7 million, but earnings per share of $0.40 fell slightly short of the $0.42 forecast. Analyst sentiment is now bifurcated: JPMorgan raised its price target to $94, citing a strong Q3 revenue growth outlook of 14%-16% year-over-year, while Keefe, Bruyette & Woods maintained a Market Perform rating with an $85 target, explicitly highlighting the legal risks. The primary beneficiary of this legal action could be CoStar, as any unwinding of the Zillow-Redfin deal would likely restore a more fragmented competitive landscape in the rental advertising market.

Key Decisions for Investors

• Investors should price in a significant valuation risk for Zillow (Z) and Redfin (RDFN) due to the FTC lawsuit, as potential structural remedies could directly unwind the estimated $100 million in annualized revenue Zillow gained from the partnership.
• Consider CoStar Group (CSGP) as a potential long or a pair trade hedge, as it is positioned as the primary net beneficiary should the FTC succeed in dismantling its competitor's rental advertising alliance.
• Closely monitor developments in the litigation as the primary catalyst for Zillow's stock, while weighing the legal uncertainty against the company's strong underlying Q3 revenue growth guidance of 14%-16%.