For many investors (myself included), the subprime loan- and housing bust-induced financial crisis of 2008-09 is still fresh in mind. Memories of the last recession may lead some to steer clear of anything real estate market-related, especially an upstart like Redfin (NASDAQ:RDFN) that relies on home sales activity to drive results. That may especially be the case in years like 2019, when rumblings of a recession have grown to the highest decibel level in a decade.

And yet, despite indications of a slowdown in the housing market, home sales have remained stable in most metropolitan areas, and an initial forecast from mortgage market operator Freddie Mac is calling for more of the same in 2020. That's good news for Redfin. However, no matter which direction the real estate market decides to turn next, this disruptive technologist should continue to do just fine.

A home in the background with a "For Sale" sign with "sold" sticker pasted on it in the foreground.

Image source: Getty Images.

More sales, more services, and a return to profit

Redfin's third-quarter sales surged 70% higher to $239 million, driven by a 23% increase in "services" ($159 million) and a more than 600% surge in the "product" segment ($80.2 million). The latter triple-digit rise was due to Redfin buying and selling homes on its own platforms. 

As a result of the big year-over-year increases, Redfin developmental efforts are finally bearing fruit. Cost of revenue grew 88%, but operating expenses were kept to just an 18% increase. As a result, net profit during Q3 was $6.78 million, which helped offset some of the steep losses experienced early in the year. There's still a ways to go for the company to be a robust profit generator, but growth is still clearly the name of the game at this point. 

Metric

Nine Months Ended Sept. 30, 2019

Nine Months Ended Sept. 30, 2018

YOY Change

Revenue

$547 million

$363 million

51%

Cost of revenue

$442 million

$270 million

64%

Operating expenses

$177 million

$125 million

42%

Net income (loss)

($73.0 million)

($29.8 million)

N/A

YOY = year over year. Data source: Redfin. 

A market share disruptor

The best news in the report, though, was that Redfin continued to scoop up share of the large U.S. real estate market. Market share grew to 0.96% of the total value of U.S. homes sold in the quarter, up from 0.94% in Q2 and 0.85% during the same period in 2018. Should the housing market suddenly take a nose-dive, the company's ability to consolidate buying and selling to itself will go a long way toward offsetting a decrease in average home values or a decrease in brokerage activity. 

There could be plenty of room for further disruption, too. Technology that benefits the consumer continues to expand, with Redfin Now (which lets users get direct purchase offers from Redfin, skipping the hassle of listing and closing) and Redfin Direct (where buyers can place a bid without a buyer's agent, saving the seller the extra commission) expanding into new markets. Now the technology-driven broker is making an ongoing effort to market its self-service offerings and lower cost.

Besides marketing to pick up new customers, CEO Glenn Kelman also talked about the importance of machine learning -- a branch of artificial intelligence -- to the future profitability of Redfin. The company rolled out new tools to help optimize the pricing given on Now buy offers. Even though the segment has been growing triple-digits over the last year, Kelman said gross margin improved from negative 2.7% a year ago to negative 0.9% during Q3 2019. Running at a loss doesn't sound great, but bear in mind that Now is only available in 10 cities at this point. As it gets bigger, the AI will get better at accurate pricing, and Redfin's market share will subsequently increase -- both of which will ultimately benefit the bottom-line. 

In short, there's a lot going for this real estate brokerage, and it's not just a resilient U.S. home buying industry. Technology is helping it win over new customers with self-service and more affordable selling costs. That's a strategy that should pay off in the long-term, recession or not.