One of the most recognized names in modern real estate, online broker Redfin (RDFN -2.70%), launched its IPO last month.
On its first day of trading, the company's stock popped by 45% over its IPO price and, although it's had some up-and-down moments since then, it's managed to add a few more dollars to that level. We can say the stock is the hit tech IPO of the summer. And I would expect it to rise even higher.
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In-house house slingers
Redfin's success with investors isn't because it's pumping out the profits. In the tradition of young-ish companies with a heavy or exclusively web presence, it habitually posts bottom-line losses.
A key reason for this is the company's business model. In sharp contrast to top rival (and recent stock market disappointment) Zillow (Z -1.44%), Redfin has an army of in-house brokers who draw a regular salary for their work. Zillow's brokers are effectively business partners, independent operators who pay fees to have their properties listed on Zillow.com.
This is a good news/bad news proposition.
Zillow's middle-man approach is light on the costs, while Redfin has to pay out to keep those house-slingers employed (they close nearly three-quarters of the company's total sales, after all). Looking at their respective costs of revenue reveals a stark difference; Redfin's are close to 90% of overall revenue, compared to Zillow's wafer-thin 8%.
However, Redfin's model allows the stock market newcomer to compete strongly on pricing. A big appeal of its service is the low commissions it charges. A homeowner buying through Redfin pays only 1% to 1.5% of the purchase price, the company says, which is significantly lower than the commission in a classic broker transaction.
Given the high prices of homes in many U.S. markets, that can make a difference of thousands of dollars. This gives Redfin a powerful competitive advantage that is tough to attack.
If you build it...
Redfin has several other positives going for it as well. A major one is the good health of the U.S. housing market, which has been fueled over the past few years by a thriving economy and interest rates that are still extremely low on a historical basis.
Another plus is that Redfin has clear and obvious prospects for growth. The company was active in 84 U.S. markets, as of its last IPO prospectus, so it can push into many more in order to expand organically.
The company has also built a highly effective tech platform using proprietary software; its data-collection abilities and the tech it can leverage (for both its brokers and its customers) will make it even more competitive going forward. (By the way, it says that Redfin.com is the No. 1 most visited online real estate brokerage site.)
The roughly $138 million in gross proceeds it collected from the IPO, which the company sensibly aims to utilize for purposes such as "technology and development and marketing activities, general and administrative matters, and capital expenditures," will help greatly in this regard.
Lastly, we should keep in mind that as of now, there are only two major online real estate agencies on the stock market. On the back of that thumping economy and those low borrowing rates, both Redfin and -- when it assuages concerns about its coming profitability -- Zillow should continue to attract investors eager to capitalize on those trends.
