How Redfin Has Weathered the Pandemic

Redfin (RDFN 8.49%) shares fell with the broader markets in the early days of the pandemic, but the stock since late March has recovered nicely and has more than doubled for the year.

In this Nov. 12 discussion on Motley Fool Live during the recording of the Industry Focus podcast, Motley Fool analyst Tim Beyers and Industry Focus host Nick Sciple provide an overview of Redfin's business and talk about why the company has been able to outperform during a very unusual period.

Nick Sciple: Why don't you give us a high-level overview of what Redfin is and what they do?

Tim Beyers: Yeah, Redfin, they call themselves a technology powered real estate brokerage. What makes them different, Nick, is they handle the entirety of the real estate transaction, they don't have, say, real estate agents who are contractors and have, like, an affiliate group; which is the way the model tends to work. All the brokers are employees, the engineers who write the code, they are employees, everybody is an employee at Redfin, it's very rare for them to use partner-brokers, they do it in some areas, but they try to make that a rarity.

So, Redfin is a national brokerage. They use a lot of technology. They do a lot of virtual tours. The pandemic has been pretty interesting for them, because they've been working on things like virtual tours and a more robust mobile app for a really long time, and during this pandemic that has served them very well.

Sciple: Right. And this is a company that from the first has been a tech-enabled platform, when you have a scenario as this year has presented, where folks can't go see homes in-person, but there's been a big surge in demand, which we'll talk about a little bit later, it really sets up nicely for Redfin. Another thing is you see some of these regional migrations happening, a business that is national like Redfin is, they have that national brand that they can migrate with folks.

Beyers: Right. And this is one thing that CEO Glenn Kelman and one of the reasons I really like this business is because of him. He is a CEO who acts like a founder, he's not the founder of Redfin, but he's been around this company for a really long time, and actually helped guide them through the original 2008 crisis when Redfin was still a pretty young company, and was able to guide them through. He's a conservative manager, but he's very passionate. His employees tend to like him. I think he is somebody I would consider a conscious capitalist, he really does put the needs of his employees, of his customers first, and he tries to take a whole stakeholder approach. So, this business is, for a company that's growing fast right now, it's easy to forget that they've been around for a long time, and they've been through crises before and weathered them. So, I think this is a more resilient business than people may know.

Sciple: Right. When you talk about weathering crises, that's maybe a good transition to what's happened this year with the business, coming into the year having seen four consecutive quarters of growth. In the first quarter revenue was up 73%, but then a pandemic showed up, Tim, how did the business respond to that disruption?

Beyers: Well, I mean, initially there were furloughs and layoffs. I mean, there was an expectation early on in this, and they were very clear about it that they were going to have to cut substantially their brokers. And at one point they basically shut down all brokers going out and showing homes, they just stopped doing it. So, it was painful. You know, there was a belief that they were going to have to let go of all of their brokers. It turned out that that didn't need to be the case, although early on it looked like they were going to. I mean, it was rough at the beginning, that quarter at the beginning of the pandemic was really tough on Redfin, and we thought this was going to be a hard year for them. Turns out that's not been the case at all, Nick.

Sciple: Yeah, it's wild when you look at some of these stats. So, April 7th, they announced that layoff; 25% of the employees were put on furlough through August 31st, 10% left permanently, they sold some stock to shore up the balance sheet. Then already on May 1st, they asked for 14% of their furloughed employees to return. By the beginning of May, seasonally adjusted homebuying demand was almost back to where it was in January and February. And then by the end of June, inquiries were up 40% year-over-year.

So, you go from the circumstance where it is, we might have to shut everything down, maybe we need to shore up the balance sheet, that sort of thing, to now, inquiries were up significantly. And you mentioned those partner-agents earlier, Redfin has had so much demand that they've had to lean more on some of those partners to service this demand.

Beyers: Yeah, that's true, in the short-term that is absolutely true. They tend not to do it because they like to be able to service everything in house, and they get economies of scale when they do so, but you're right, the demand has been so hot. And remember that, because Redfin is a conservative business, they are a national brand, but they aren't actually operating, at least at scale, in every single American market. They're not in every single American market, they're in a lot of them, but in those markets where they are not and where demand is hot, they do use those partner-agents. So, yeah, it's been really interesting to see how that balance has come into play here; they're using a lot more contractors than typically they do.