3 Reasons I'm Buying More Redfin Stock After Its Q3 Earnings Report

Shares of real estate technologist Redfin (RDFN -2.81%) are down nearly 20% since the company reported results from its third quarter. A breather was overdue, though, as shares have still nearly doubled in 2020 to-date as the COVID-19 pandemic accelerates technology trends that were already working in the small company's favor.

While challenges remain, the reasons for owning the digital-based agent for the long term have only gotten stronger in recent months, so I plan on adding to my position in November. 

Image source: Getty Images.

Footnotes to performance in the summer months

Redfin's share of the U.S. real estate market (by value of existing homes sold) reversed a first-ever quarterly decline in the second quarter and increased eight basis points year over year to 1.04%. A strong housing market was key, but the company's online brokerage -- which charges nearly half or less of the typical 2.5% traditional agent listing fee -- and virtual online tour of properties is the real winning formula here. 

Even with the market share gains, though, revenue actually fell 1% from a year ago to $236.9 million. The reason? As CEO Glenn Kelman explained on the quarterly conference call, the pandemic reduced the number of properties that could be sold on the RedfinNow service, where Redfin makes offers to purchase homes directly from the sellers. Since the entire value of the home is realized in revenue (versus just a commission), it has an outsized effect on the top line. 

Thus, with a property shortage still an ongoing problem that will affect revenue, gross profit on services rendered paints a better picture right now. And on that front, gross profit increased 74% year over year to $93.1 million. Net income also surged to $34.2 million compared to just $6.8 million the year prior. All in all, Redfin is having a pretty good 2020 as Americans are in migration mode because of COVID-19 and all of the new dynamics it has created (like remote work, which is precipitating the movement of people from dense cities to more suburban and rural areas). 

PP = percentage point. Data source: Redfin. 

The three reasons I'm buying

As for why I'm buying more shares, the first reason has to do with the recent pullback in the share price. While the quarterly numbers appeared to be a mixed bag, Redfin is making solid progress consolidating real estate market share, and it trades for just 4.6 times trailing 12-month sales (or 21 times gross profit, which negates revenue realized on home value sold from Redfin's own portfolio of properties). Given how small a slice of the overall pie it has, this seems like a reasonable valuation with Redfin's growth. 

Second, the company is getting more efficient as it reaches a larger scale. For example, Kelman said the company's Title Forward title insurance business should be "a reliable source of profit" after losing money this year. And Redfin Mortgage also generated its first-ever gross profit in the third quarter. There's plenty left in the tank for these two small value-added business segments. Expanding to the West Coast will also increase the percentage of home buyers the company can service with its mortgage division by some 50%, and it recently gained the ability to handle refinances. That's a massive opportunity worth billions of dollars a year. 

And third, Kelman has stated that a strong housing market marked by decreased supply of places for sale should last into 2021. But the biggest challenge ahead is hiring enough talent to match with demand. It's a tight market for hiring, though, and Redfin's top brass thinks this could create further headwinds in picking up market share through the first half of next year. No matter, though -- Redfin's disruptive brokerage platform has momentum on its side for all the right reasons: technology that appeals to consumers, price disruption, and a one-stop shop for multiple home selling and buying needs. A strong balance sheet will enable it to make further headway. At the end of September, Redfin had over $501 million in cash and short-term investments and convertible debt of just $124 million. 

As a small disruptive financial technology company, the future looks bright for Redfin. I'll continue to use pullbacks like the one in the last month after the stock reached all-time highs to buy more.