A soaring share price is often a sign that investors believe a company is executing well and that its future is bright. Redfin (RDFN -3.22%) shareholders have cheered as its share price has catapulted up 150% this calendar year. Let's see what all the excitement is about, and whether this consumer-friendly tech-based real estate company is worth buying today.

The business of disrupting an entrenched industry

In the past, selling your home required hiring a realtor and paying 5% or more of the sale price of your property as a fee. Redfin aims to make this process easier and cheaper for consumers. The company only charges a 1.5% commission for selling your home and 1% if you buy a home with Redfin within 12 months. Its scalable tech-based platform enabled it to facilitate over 24,000 real estate transactions last quarter, up 23% year over year. Not only has it attracted more customers, but they own higher-priced homes, driving up the average service revenue per transaction by 10% year over year in the most recent quarter.

It also offers two other ways for homeowners to sell their houses. With its RedfinNow service, homeowners can choose to sell their house to the company for a 7% service fee. This enables the quickest sale option for homeowners and could be attractive when downsizing or if cash is tight. Management is carefully treading into this market and is only offering it in limited locations. 

Another selling option is the concierge service, in which sellers pay a 2.5% listing fee and work with Redfin's lead agents to make targeted repairs and upgrades. These changes to the home should make it more attractive to buyers and allow the seller to capture greater value upon a sale. The seller still pays for the upgrades, but Redfin's lead agents do the hard work of coordinating the work through local contractors.

For sale sign in front of single family home.

Image source: Getty Images.

Reasons to buy the stock

This tech-based real estate company is winning customers and taking share in a highly fragmented market. Even though it had only 1.04% of the market of home sales in its most recent quarter, Redfin is becoming better known. Its growth strategy is focused on managing the home buying and selling process from end-to-end and creating an exceptional customer experience. It already has a strong mortgage business with high gross margins of 31% and solid 65% year-over-year growth in the most recent quarter.

Additionally, the RedfinNow service looks like it could be a huge winner. The company pared back its buying efforts during the early days of the coronavirus pandemic in the U.S., which caused its overall revenue to drop in the most recent quarter. But with homebuying activity picking back up, Redfin is looking to grow this business in a smart and focused way.

Lastly, its scale is getting to be an advantage. It has over 1,800 salaried lead agents and is hiring more to meet demand. With over 49 million monthly visitors to its website, it is building a solid growth engine for years to come.

Reasons to pass

Investors who like disruptive upstarts are attracted to Redfin's business model and its growing market share, but there are other factors at play that could make some shy away. Firstly, homeowners don't often sell. The National Association of Realtors reports that people stay in their houses an average of 13 years (as of 2018). With infrequent home-selling opportunities, Redfin's job is that much harder as it has to win new customers every quarter. E-commerce businesses or software-as-a-service companies that offer subscriptions could be more suited to some investors because of the more reliable revenue stream.

Secondly, the company is early in its effort to buy homes. For perspective, it ended Q3 with only 17 homes to sell. It's ramping up the service, but many of its lead agents haven't had the experience of going through the process yet. If that's not enough, this business is capital intensive. Redfin not only pays out to buy a home outright, but typically spends five months to fix up the property and make a sale. Each time it takes ownership of a house, it runs the risk it won't sell or it won't sell at a profitable price. This process could be a long-term winner, but it still remains to be seen how it will scale over time.

Lastly, it is still a human-centric business. Much of its growth and customer delight depends on hiring and keeping great lead agents. With its agents spread across the country in key growth localities, it's that much harder to ensure high-quality and consistent customer interactions.

The bottom line for investors

Analysts think Redfin could cross the $1 billion revenue mark in the coming year, making it a well-established player in this competitive market. I love its disruptive business model and customer-focused approach. But I am leery of RedfinNow's capital requirements, its dependency on frontline agents, and how infrequently its key customer, the homeowner, makes a decision to put their home up for sale. I'm cheering for the concept to succeed, but I'm investing my money elsewhere.