The U.S. housing market just surpassed $36 trillion in total value after its biggest year of growth since 2005. Consumer demand has been driven by record low interest rates and aggressive government stimulus programs designed to combat the pandemic, and tech-based realtors are reaping the benefits.
Redfin (NASDAQ:RDFN) aspires to change the way houses are bought and sold by using an army of employed real estate agents, complemented by a blossoming direct buying business. It has successfully saved sellers over $1 billion in listing fees, the company claims, simply by leveraging its size and scale to out-price independent brokers.
Homebuyers are turning to Redfin in bigger numbers, sending its share of total U.S. home sales consistently higher, which makes it a great bet for the future.
A blockbuster second quarter
Redfin announced its second-quarter results on Aug. 5, and while you shouldn’t place too much emphasis on one quarter, it delivered some eye-popping numbers.
U.S. market share by value
24 basis points
The company’s broking segment makes up the higher portion of total revenue at 63%. It’s the service side of the business that focuses on the traditional real estate sales process using over 2,450 Redfin lead agents.
The product segment represents the direct buying business, where Redfin purchases homes from sellers with the intention of reselling them for a profit. While it’s the smaller piece of total revenue, it’s growing above trend at 138%, and in Q2 it bought 40% more properties than it did for the whole of 2020.
The company still operates at a loss because it’s focused on growth — the business of charging lower fees in real estate, which is traditionally a labor-intensive industry, only works on a large scale. However gross profits are climbing rapidly, which affords Redfin the flexibility to pare back costs in the future to deliver positive earnings.
But most importantly, its plan is working, with a growing share of overall U.S. home sales flowing its way.
A long-term play
The real estate industry was due for disruption. Even though the internet boom happened decades ago, it’s only now that the model is really being shaken up. Consumers don’t view their homes as disposable goods, so careful consideration often goes into sales and purchases.
The thought of transacting with a tech company on such a meaningful life decision may have seemed far-fetched, but it’s evident people are warming to the idea for its convenience. By selling your home directly to Redfin, you can guarantee a cash payment and avoid months of open houses and uncertainty.
Revenue generated by the overall real estate broking industry is expected to grow by just 0.4% in the U.S. this year, so judging by Redfin’s CAGR it’s clear the company is stealing significant market share from traditional operators.
But that trend is enforced by the growth in Redfin’s share of overall U.S. home sales.
First Half 2021
Redfin share of U.S. home sales
Average monthly website visitors
The company is likely to soon double the number of average monthly website visitors compared to just a few years ago, highlighting the popularity of its modern approach.
But Redfin hasn’t stopped at buying and selling houses. It’s on a mission to dominate the rental business, too, starting with acquiring RentPath in April for $608 million in cash. RentPath owns multiple leading rental websites with 16 million monthly visitors that will now be introduced to Redfin’s brand through a mutually beneficial integration.
Why you should buy it
There has never been such a unique way to get exposure to the growth of the real estate market, and Redfin’s technology is highly scalable. While Redfin has some key competitors with a similar vision, they tend to be more focused on the direct buying segment, and none of them have the agent-driven sales model that Redfin does.
Competition might be fierce in direct buying, but on the broking side, Redfin is competing with traditional operators that often charge listing fees more than twice as high — giving the company a significant advantage to continue taking market share.
And while growth has been incredibly strong so far, in 2022 analysts expect revenue to be 31% higher than the lofty 2021 estimates. With a market capitalization of just $5.1 billion it would place the stock at just over two times sales, and that could represent significant long-term value.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.