Redfin (RDFN) is a residential real estate brokerage. The company uses technologies such as map search and virtual house showings to increase exposure, improve the quality of the customer experience, all while delivering efficiencies and saving the consumer costs. Redfin also provides the ability to do digital and online document management making it a one stop shop for one’s real estate needs. Their mission is to redefine real estate in favor of the consumer. To change an industry that has had little disruption. Redfin’s business model to undercut competition is based on sellers paying Redfin a discounted fee, either 1 or 1.5% to list the seller’s home.
This company does it all, they will buy your house, sell your house, you can buy a house on it, get approved for a mortgage, get a mortgage, or even hire a concierge service to get your home ready for people to view it in person or online. They have the best user interface out of all the real estate online models and have a more hands on approach, as well as a great track record of smart growth led by strong management which cannot be said about other players in this space.
User interface is much more user friendly
Introduction
This DD is about Redfin. Here is the background on Zillow with their earnings, their horrible algorithm to buy homes purely based on surround location data made them shut down their iBuying program and cut 25% of employees. In 3 months alone Zillow lost over 420 million dollars. The stock after earnings has lost over 40% of their value in a month. This DD is not about Zillow but is about Redfin.
This collapse of Zillow has hurt the outlook and confidence from investors in the online real estate/brokerage space. Even though Zillow now primarily only makes money by selling advertisements to real estate agents to list their home, much different then the multiple use approach Redfin uses.
RedfinNow which is the iBuying program that Redfin launched in 2018, is under a microscope due to Zillow’s pitfalls from investors. While Zillow dropped the entire program, Redfin is committed to aggressively growing their program which is displayed by their cash from investments on the cash flow statements where 414 million was used to buy homes. They still however have a strong balance sheet with other 562 million dollars in cash.
Stocks falls when there is uncertainty. Investors tend to avoid uncertainty. The big question for Redfin is if Zillow, which is widely considered to have the most complete real estate data in the industry and has been around for far longer than Redfin, is failing to see the light at the end of its Zillow Offers tunnel, will Redfin eventually fold its hand as well? No.
Redfin uses real people, and visits the home on site and actually actively invest in these houses. Zillow relies purely on bullshit numbers that don’t apply to every house in the same way. People are nervous of this investing by Redfin into iBuying….but Zillow left so now there is more room for Redfin to grab market share. Now is a great time to enter Redfin.
iBuying can and will be effecitve
The investment thesis
Redfin which is only 1% above 52 week lows after the Zillow miss, will trade higher through a revolutionary strong iBuying program, increase in housing supply, rentpath acquistion, and the rise of interest rates is not to fear.
iBuying program
Redfin reported its third quarter earnings, beating expectations for revenue ($540 million, up 128% year-over-year), and just missing on earnings per share (-$0.20). They posted a small profit of only $20,000 this quarter with this program. Which is much better than the 400 million dollars lost by Zillow. Zillow tried to expand too fast with this program, which made their balance sheet too volatile and eat up too much capital.
Redfin isn’t placing all its eggs in one basket with iBuying. “It’s part of what we do, but it’s not who we are,” Glenn Kelman the CEO and face of Redfin said, It’s one of many offerings available to customers, including a brokered sale with a lower transaction fee paid by the homeowner.
Redfin is doing controlled growth in a new space. Redfin is slowly moving their iBuying program city to city (currently in more than 20 cities), and as earnings continue to grow and come out, confidence will be stronger in their iBuying program.
Zillow went wrong with being too aggressive and shot themselves with a RPG in the foot. But this feature that Redfin continues to grow and expand, not only brings more customers to Redfin but is making it the one stop shop for real estate for their consumers. This program is an exciting segment that is not even the primary focus of their business. And the program is only a few years old and is already profitable. The management is showing their value with how Zillow messed up.
Increase in housing supply/ Interest Rate Concerns
More affordable housing is finally coming back onto the market. More low-priced homes were put up for sale in the third quarter of 2023 than any other segment, according to the latest housing report from Redfin. Homes in the “most affordable” tier, which represents homes priced below 95% of others on the market, rose by 13% compared to a year prior.
This is important because right now, houses are expensive. People have thought Redfin would do amazing from the home price surge we have seen since the pandemic. Truth is, growth has had a dent due to the high prices of these houses. People that are working class use Redfin, not your typical multimillionarie Chad who doesnt mind paying the hot real estate agent an extra 3-4% on commission.
With the price of lumber, labor supply, and super low mortgage rates which contribute to the higher listing prices of homes….an increase in interest rates will actually benefit Redfin I believe. A rise in interest rates will not mean a foreclosure market…but rather a rebalanced market.
The larger supply of homes at the cheaper end of the spectrum can relieve pressure on prices and create an opportunity for more people to buy. That means more balance between demand and supply across the housing market in the next year, and less intense competition for homes. The increase in supply for affordable listings is coming at a good time for those people who want to buy homes but don’t want to put a down payment of 50k. This is Redfin’s customer base and this will benefit their business model. the fear of interest rates is being overlooked, and will be a benefit.
Acquisition of Rentpath
In February, Redfin moved into the rental industry, acquiring RentPath for $608 Million. RentPath has more than 20,000 apartment buildings on its rental websites, and grew its traffic more than 25% last year. One in five of Redfin’s 40+ million monthly visitors also wants to see homes for rent.
Redfin plans to have all of Rentpath’s listing on their own website by 2023, the partnership will allow for:
- Better Search Experience
- Better Value for Advertisers
- Higher Traffic Growth
This allows to open up to a younger customer base as many younger people want to see rentals because they are not in a position to buy a house whether it be because of finances, job, etc.
Add in the extreme surge in home prices….renting is a very attractive option….and by getting younger people who typically rent on redfin platforms they will be more likely to return when it comes time to buy a home. A great long term business model for growth and shows again the competence of management.
What do the Wall Street Pros think? Risks?
There is a wide range but the average sees a 37% upside
Overall Wall Street thinks the stock is undervalued. There are bears with the lowest thinking the price in a year will be $27 which can happen if the housing market does not increase supply to match demand in the affordable sector. But if the housing market prevails and Redfin Now beats expectations that are already low due to Zillow’s pitfalls I see that the high price target of $88 definitely being possible.
The Play
Obviously this could be a longer term play. I entered today on 5 Feb 18 ’22 $45 calls, may add more as I am down 11% to average, they are trading at 52 week lows and for a stock that typically trades in a 50-60 dollar range the last few months, trading at around $5.40 while having a beta of almost 2 after a 17% drop from highs this month. Seems like one hell of a play leading into next earnings once the Zillow worries subdue and housing supply numbers continue to impress.
This article was written by u/Amurphy747.
