Small-cap stocks can deliver explosive gains to investors. With market capitalizations below $2 billion, these businesses are small enough to grow exponentially if they're successful, generating fortunes for shareholders along the way.
However, they can also produce sizable losses, up to and including a complete loss of capital should they fail. That's why it's important to invest in only the best small-cap stocks -- those with strong competitive advantages and massive long-term growth opportunities.
Read on to learn about an excellent business that meets these challenging criteria -- and that's poised to reward investors handsomely in the years ahead.
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An industry disruptor
Redfin (RDFN +0.00%) is a disruptive upstart within the $80 billion U.S. real estate brokerage industry. The online marketplace and discount brokerage company accounts for only a small piece of the industry's sales, yet it's rapidly gaining share, thanks to the cost savings and convenience it provides to its customers.
Redfin charges home sellers commissions as low as 1% of the sale price of their house, which is substantially lower than the typical 3% seller agent fee. While that may not sound like much of a difference, with the median home value in the U.S. now nearly $227,000, a 2% discount in fees can save sellers more than $4,500, on average. In markets where homes are more richly valued, such as California, the savings can be more than $10,000. Homebuyers can also save significant sums by using Redfin, with commission refunds that average $1,700.
By saving its customers money, Redfin is quickly taking share from its competitors. It accounted for 0.83% of the value of all existing U.S. home sales in the first quarter, up from 0.73% in the prior-year period and 0.33% back in 2014. In turn, Redfin's brokerage revenue jumped 16% year over year, to $81.3 million.
An expanding suite of services
Redfin's ancillary businesses are growing even faster than its core brokerage operations. The company's RedfinNow homebuying business purchases houses directly from home sellers for a 7% fee, or about 1% more than the total amount of overall agent commissions they would normally pay with conventional brokers. The value proposition to sellers resides in their ability to sell their homes quickly and without the hassle and uncertainty of a traditional sale. The service is enjoying strong early demand: Revenue grew nearly sevenfold, to $21.4 million, in the first quarter.
Redfin is also expanding into additional areas such as mortgages and title services. Revenue in this segment soared 59% year over year, to $3 million. Perhaps more importantly, these services complement Redfin's core brokerage business. As an example, customers who use Redfin's brokerage, mortgage, and title services can typically use a more convenient and timesaving digital closing process. This, in turn, helps to boost customer satisfaction and repeat business.
A discounted price
Despite Redfin's intriguing expansion potential, its stock price is down about 15% over the past year. Investors appear to be focusing on the company's heavy growth investments, which have weighed on profitability.
But Redfin is wisely spending money today to capture a far larger share of the industry's profits in the future. Moreover, the company's $1.7 billion market capitalization likely understates its massive long-term opportunity.
It's certainly possible that Redfin could ultimately capture 5% or more of the U.S. brokerage industry, perhaps even in the next decade. Should it do so, Redfin's market cap could exceed $10 billion at that time. This would equate to nearly a six-bagger for investors who buy today.
As such, long-term investors may want to begin building a position in Redfin today.
