Residential real estate is one of the largest markets in the United States. In 2020, existing home sales totaled $1.9 trillion in transaction volume, and that figure is likely to rise in the years ahead, as remote workers now have the flexibility to live anywhere.
With that in mind, Redfin‘s (NASDAQ:RDFN) disruptive business model is gaining traction with consumers, and the company is well positioned to gain market share. Here’s why this stock could make you rich.
Last year, 5.6 million existing homes were sold in the U.S. at an average selling price of $331,900. Assuming a 5% commission fee, that puts Redfin’s core market opportunity at nearly $94 billion.
So what makes this company special? Redfin is an end-to-end solution. It offers brokerage, mortgage, and closing services to home buyers, streamlining the purchasing process. It also provides brokerage services to sellers, in addition to buying homes directly through RedfinNow. The latter option gives sellers the assurance of an all-cash offer, while eliminating the headache of repairs, prep work, and open houses.
Moreover, Redfin agents are employees that earn salaries, not independent contractors who work for commission. This allows the company to charge home sellers lower commissions — typically 1% to 1.5%, versus the industry average of 2.5% to 3%. The company also refunds buyers a portion of their commissions. In short, Redfin simplifies real estate, and it often saves its clients some money in the process.
Redfin’s financial performance
Redfin currently operates at a loss. Even so, the company is making progress across each of its three business segments. Let’s look at them individually.
Redfin primarily generates revenue through real estate services, including the commissions and fees earned when Redfin agents or partners close sales. In this segment, gross profit surged 168% to $40.4 million in the first quarter, driven by an increase in brokerage transactions and revenue per transaction.
Redfin also generates property revenue on the direct buying and selling of homes through RedfinNow. In this segment, gross profit flipped into positive territory, reaching $1.6 million in Q1. This was primarily due to a decrease in the cost of purchasing homes.
Finally, Redfin generates other revenue on mortgage, settlement, and advertising services. Here, gross profit came in at $369,000, up from -$2.0 million in the prior year.
To summarize, Redfin’s services business achieved a gross margin of 24%, while its property and other businesses were much less profitable, with gross margins of 1.7% and 3.9%, respectively. Even so, each segment is critical to Redfin’s competitive edge, as they work together to create a comprehensive offering that few other brokerages can match.
More importantly, it’s encouraging to see positive gross profit from RedfinNow. This progress suggests that the company’s digital-first vision is viable, and investors should look for that trend to continue in the coming quarters.
As of Q1 2021, Redfin owns 1.14% of the U.S. residential real estate market, up from 0.83% in Q1 2019. That may seem low, but this industry is highly fragmented. In fact, there are over 130,000 brokerages in the United States, very few of which can match Redfin’s scale.
Case in point: Its website averaged 43 million monthly visitors last year, making Redfin the third-most-popular real estate site in the U.S., according to Comscore. That advantage, along with the simplicity created by Redfin’s end-to-end offering, should help the company gain market share in the years ahead. That’s why this growth stock could make you rich.
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.
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