Description
Goal: This write-up will quantify how RDFN can achieve steady profits long-term and potentially even quicker than management is projecting to sell-side and investors. Redfin is not an under the radar name and I suggest reading previous VIC write-ups for business details and breakdowns if you are not familiar with the name. These write-ups do a good job at explaining the business and how it works. Especially, shoutout to Holland1945’s short thesis.
Opportunity: What is intriguing about Redfin is you can buy it today at a discount of 25-50%+ from its IPO price and 30%+ below March 2020 lows while the company is approaching profitability for the first time in its history and with iBuying shenanigans now behind both Redfin and the industry. Unlike Zillow, Redfin was able to show more discipline with entering the iBuying market, and because of this and of Redfin’s business model, Redfin was able to grow 2022 revenues +19% year over year vs. -9% declining 2022 revenues for Zillow. Redfin and Zillow have the similar revenue sizes and employees/headcount, so the sign of relative profitability gives Zillow a $10.0B market cap vs. Redfin’s $863mm (Zillow does have 3-4x more users than Redfin). That’s greater than a 10x potential over the long-term if Redfin can correct the ship and you get to buy this opportunity at 25-50%+ discounts to IPO price. Over the short-term, any signs of profitability growth would lead to at least a double back to the range of IPO pricing to first day trading of $15-22/share vs. $7-8 today.
**I originally posted this at $7.49/share 3/5/23 vs $9.06 close today. Given it was close to the deadline a glitch caused it not to publish plus some members don't like the idea.
In this environment, where even VC investors are looking for profitability, disgraced Opendoor (where consensus is that Opendoor is heading to bankruptcy) commands a higher valuation than Redfin. Opendoor has a $983mm market cap.
*I’ve personally heard stories from those working at prestigious NYC PE/HF firms about being fooled by OPEN and holding from $15-20/share to currently $1/share.
The Numbers and Old Model: For context, RDFN IPO’ed July 2017 and this data goes back to 2014:
Year 2014 2015 2016 2017 2018 2019 2020 2021 2022
Revenues ($M) 125 187 267 370 489 780 886 1,923 2,284
Op. Income/Loss -25 -30 -23 -16 -44 -79 +1 -110 -363
Net Loss -25 -30 -23 -15 -42 -81 -19 -110 -321
What’s Changed: A couple weeks ago during earnings, management made and noted a few recent changes. Notably in December, RDFN eliminated its buy-side refund. They mentioned this adds $1,000 of revenue and gross profit to each brokerage transaction. Secondly, workforce reductions in June and November 2022 from over-hiring and meeting lower demand, given macro cooling. This is because what made net loss explode after 2020 was not fixed costs or COGS, but variable costs such as marketing that are up ~3x, or 200%, from 2020 to 2022. What’s further interesting is that no analyst challenged where they are coming up with this clean aforementioned $1,000 number, whether it is too conservative or aggressive, or how it will flow through to the bottom-line.
Incoming Profits: Eliminating a buy-side refund has at least three effects: #1) it should have no financial cost to the company, #2) therefore it breaks the short thesis that agents need to be more productive as their current productive is more than enough in this new model for RDFN to breakeven, and #3) the $1,000 revenue and gross profit to each brokerage transaction is a big sandbag.
#1) Reminder IPO’ed 2017
Year 2014 2015 2016 2017 2018 2019 2020 2021 2022
Brokerage Trans. (K) 12.7 18.6 25.9 35.0 43.0 53.2 60.5 76.7 66.6
* $1,000 (same numbers, but units are now changed dollars)
Adj. Net Inc./Loss -12 -11 +3 +20 +1 -28 +42 -33 -254
Reminder that Redfin is guiding to positive adjusted EBITDA in 2023 and positive net income in 2024.
#2) So backdating and testing historical data with Redfin’s new model of eliminating buy-side refunds while still maintaining fees well below industry rates produces many years of profits and ekes out profit before IPO. If you remove 2021 and 2022 housing market explosion where every growth company spent as many dollars as possible, though RDFN was clearly relatively more discipline than peers such as Zillow, then steady profits become much easier to see.
#3) Now sandbagging has multiple elements embedded too.
The average buyer refund on RDFN isn’t $1,000, but north of $1,500.
The Average Sale Price of New Homes Sold in the United States:
Year 2014 2015 2016 2017 2018 2019 2020 2021 2022
($K) 346 361 361 385 385 384 392 464 544E
In comparison, RDFN is offering $1,511 for ~ $392K houses and $392K is the pre-COVID average – not even assuming higher levels today. Google searches will show you agents refund anywhere from 0.5-1.5%+ of the house price. Hence, sticking to pre-COVID average of the previous example ~$395K would yield refunds of $2-6K+.
Scenario Analysis: Reminder IPO’ed 2017
Year 2014 2015 2016 2017 2018 2019 2020 2021 2022
Net Loss -25 -30 -23 -15 -42 -81 -19 -110 -321
Brokerage Trans. (K) 12.7 18.6 25.9 35.0 43.0 53.2 60.5 76.7 66.6
* $2,000 (units are now changed dollars * 2)
Adj. Net Inc./Loss +1 +8 +29 +55 +44 +25 +102 +44 -187
PROFITS IN EVERY YEAR EXCEPT 2022!
Also, a $2K rebate is just 0.4% of 2021 average home price sold $464K. That is below the 0.5-1.5%+ average agents refund of the house price.
* $4,000 (units are now changed dollars * 4)
Adj. Net Inc./Loss +26 +46 +81 +125 +130 +131 +223 +198 -53
A $4K rebate is 0.7% of the estimated average home price sold of $544K. This large of a refund would bring profits that rival Zillow’s, which again has >10x the market cap.
There could be more upside if Redfin achieves better costs (marketing, tech, G&A) as a percentage of revenue through methods they mentioned such as workforce reduction, unwinding of the iBuying business, and higher margin activities to monetize traffic.
The bear cases and risks are 1) execution – a) letting go of too many agents and/or b) agents become less productive if their incentive (compensation) declines by too much, -- RDFN will have to balance fixed and variable salaries, 2) key man risk – Glenn Kelman has been at the helm and is a well-respected leader and manager, we are seeing CEOs, such as PYPL’s, being pushed out recently due to slumping stock prices. 3) switched from net cash to net debt recently, and 4) macro – housing market already exploded and is now cooling off, rates may continue to rise leading to more people and companies defaulting at refinance time, and rates and inflation continue to increase.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Catalyst – 1) Redfin starts a trend of profitability – the most recent quarter was a beat and raise noticeably on shrinking losses which is the most watch financial statement line currently, 2) macro calls for a bottom come to fruition and rate increases start to slow or stop, and 3) valuation multiples have always been suppressed, even before COVID, given a lack of confidence and direction on whether the company could become profitable; so if it does, multiples could expand meaningfully.