Originally posted on https://financhill.com/blog/investing/redfin-stock-forecast
Redfin Stock Forecast: Though e-commerce hasn’t outpaced brick-and-mortar sales quite yet, that day is coming – and soon. Online spending with US-based merchants was up 15 percent year over year in 2018, totaling $517.36 billion. As a percentage of overall retail spending, e-commerce is increasing.
In 2016, only 11.6 percent of transactions were made online. That figure rose to 12.9 percent in 2017, then 14.3 percent in 2018. Perhaps more importantly, e-commerce accounts for more than half of annual retail sales growth.
Consumers are developing a preference for buying goods and services online, as evidenced by these figures and the massive success of online sellers like Amazon, Alibaba, and eBay. However, there are some industries that have barely been touched by this trend. Buying and selling real estate is at the top of the list.
Real Estate Sales in a Digital World
Of course, that isn’t to say that the real estate industry has dodged the digital revolution altogether. Almost every real estate agent has an online presence, and online advertising is just as important in real estate as it is in any other market.
Popular sites like Zillow and Trulia are often the first stop for those considering a move, thanks to the comprehensive information they offer on specific properties available for sale, and the tips and tools provided to simplify the process of buying and selling a home. These companies make their money through advertising and lead generation.
So far, no company has had widespread success in creating a platform where buyers and sellers can complete the entire real estate transaction online. This is primarily due to the complexity of such transactions. However, a few online real estate companies are ready to take the leap, and Redfin is leading the way. If successful, the Redfin platform promises to disrupt the real estate industry.
Some investors are already on-board, convinced that digital real estate transactions are the future of the industry. Others aren’t ready to commit, sure that the concept is an iteration of earlier platforms that failed. So, what’s the bottom line? Is Redfin a buy?
What Does Redfin Do?
Redfin [NASDAQ: RDFN] was founded in 2004 by three entrepreneurs with a vision for leveraging the internet to simplify buying and selling real estate – and to save clients money.
Unlike Zillow and Trulia, Redfin was founded as an online brokerage. The company earns money when customers buy or sell property with Redfin agents.
The early features developed for the Redfin platform were groundbreaking. Keep in mind, at that time, Google Maps wasn’t available. Buyers searching for a home in a particular neighborhood had to check each address on a traditional paper map. Redfin was the first to display available homes on an online map – a tool that homebuyers can’t imagine doing without today.
From 2006 on, Redfin has been recognized as a leader in real estate and tech innovation. The company was honored with prestigious awards like Seattle 2.0’s Best Startup (2010) and Business Insider’s The DIGITAL 100: World’s Most Valuable Private Tech Companies (2012).
The company held a successful IPO on July 28, 2017.
Today, Redfin’s site averages more than 36 million visitors every month. It offers substantial savings for sellers, charging just 1 percent – 1.5 percent commission for a listing, as compared to the 3 percent commission that traditional agents require.
More importantly, sellers are finding success through Redfin. Data show that homes listed with Redfin sell faster, and the final sales price is higher than comparable homes sold through traditional means.
How Redfin Innovates For Buyers & Sellers
Serving as an online brokerage was just the first step for Redfin. Its commitment to simplifying real estate transactions has resulted in a variety of additional services.
For example, sellers who want to offload the prep work involved in listing a property can pay an extra 1 percent in commission for Redfin’s Concierge listing service. Experts handle renovations, cleaning, and staging.
Redfin [NASDAQ: RDFN] has also taken on the financial tasks that tend to cause buyers and sellers the most stress – mortgage financing, title insurance, and escrow. The company offers opportunities to obtain these financial products at competitive prices, simplifying transactions by ensuring coordination between providers.
Redfin is exploring methods of making the bidding process digital.
In certain pilot markets, buyers can bid on available listings. If sellers accept, they pay a 2 percent commission to Redfin.
Of the 120 homes listed on Redfin in the Boston market, five sold through this service between March and May of 2019. The 2 percent commission is approximately half of what sellers would pay to traditional real estate agents in the Boston area, so the savings is substantial.
The biggest news in real estate disruption is Redfin’s plan to make the selling process almost instantaneous.
In certain markets, Redfin is buying and selling homes directly through its RedfinNow feature. Basically, sellers request an offer, Refin appraises the property, and a Redfin inspector visits the home. If the seller is comfortable with the Redfin [NASDAQ: RDFN] offer, Redfin buys the property immediately. The company then sells it through its online platform.
Redfin’s profits come from the 7 percent brokerage fee charged for this service. It also plans to make offers slightly lower than market value, in hopes that sellers will accept the discount in exchange for getting the transaction wrapped up quickly.
So far, Redfin has introduced RedfinNow in eight markets, though the goal is to offer the service nationwide in coming years. RedfinNow is not yet profitable, but real estate experts and analysts are excited by the possibilities.
The Benefits and Risks of Buying Redfin
Buying stock in any company requires a leap of faith, but Redfin is riskier than most. True, revenue and market share are growing – but the company has not yet been able to turn a profit.
Revenue growth for the past five years is as follows:
- 2018 – 32 percent
- 2017 – 38 percent
- 2016 – 43 percent
- 2015 – 49 percent
- 2014 – 37 percent
Percentage of brokerage market share for the past five years is as follows:
- 2018 – 0.81 percent
- 2017 – 0.67 percent
- 2016 – 0.54 percent
- 2015 – 0.44 percent
- 2014 – 0.33 percent
Considering the total real estate is worth $80 billion, this is a promising trend.
The downside is that Redfin [NASDAQ: RDFN] is currently operating at a loss. For the second quarter of 2019, revenue increased by 39 percent year-over-year – but that didn’t keep pace with the cost of revenue (49 percent increase) and operating expenses (53 percent increase).
Net loss, year over year, went from ($33.2 million) to ($79.8 million).
This is where investors must take a leap of faith. Business leaders expect revenue to grow 59 percent year over year in the third quarter, driven by RedfinNow.
Revenues for Redfin now increased 344 percent to $39.9 million in the second quarter. Other businesses are expanding, as well. Mortgage and title service revenues went up substantially. These increases are projected to produce a small profit – between $3.4 million to $6.4 million – in the next quarter, and business leaders expect substantial profits within three to five years.
Investors willing to gamble on the trend towards online real estate transactions would be smart to buy Redfin shares while the price is relatively low. Though there is certainly a chance that digital real estate sales won’t take off, every indication is that consumers are ready and willing to buy and sell homes online. If so, Redfin [NASDAQ: RDFN] is poised to be the leader in this space.