Redfin (RDFN +0.00%) stock took a much-needed breather after its fourth-quarter 2020 update (share prices are down nearly 40% from all-time highs in February as of this writing), but growth will get off to a good start in the first quarter per management's outlook. In fact, as the economy begins to reopen, Redfin could be a big beneficiary. Granted, so will its much larger peer Zillow Group (ZG 1.99%)(Z 2.00%) and fellow tech upstart Opendoor Technologies (OPEN 2.89%), but neither convinced me on their Q4 updates they were a better bet than Redfin is at this juncture.
A well-rounded play on a tech-enhanced real estate transaction
First, I'd like to acknowledge Redfin's two partners in disruption of the real estate status quo. Zillow in many ways got this party started with its internet and media business helping connect home buyers and sellers to an agent, and its core business grew at a rapid pace to end 2020 -- as did its leading complementary services like Zillow Mortgage. This is the largest of the three companies I'm discussing here and likely will be for some time.
Image source: Getty Images.
Opendoor has pioneered the software-based direct buy-and-sell real estate market, but it also has the biggest hole to dig itself out of. It sold 83% fewer houses in Q4 2020 than it did a year ago. It has a massive war chest of nearly $1.5 billion in cash and equivalents with more cash on the way from the sale of new stock in February -- but it will need it to play catch-up as well as build out its own complementary services like mortgages and other services critical to a home purchase.
Meanwhile, Redfin is still a small brokerage making fast progress on all of the above-mentioned fronts. It had difficulty during the pandemic onboarding enough agents to meet the demand it was bringing in for buying and selling a home; its website grew into the largest real estate brokerage search site (versus Zillow's leading home search site, but Zillow isn't a brokerage). Redfin is also quickly expanding its iBuying service to new markets (comparable to Opendoor's offering) and has established a mortgage and title business that is growing quickly and only just beginning to contribute to profitability. And Redfin is acquiring RentPath, adding top apartment search sites to its platform.
Though this is a small company (enterprise value of $6.4 billion, compared to $31.5 billion for Zillow and $11.2 billion for Opendoor), Redfin is in many ways the most complete bet in an evolving residential real estate market.
Redfin has good prospects and a reasonable valuation
This small technologist also foresees resurging growth for Redfin to kick-off 2021. Revenue is expected to increase at least 30% year over year in Q1, and it's nearing full-year unadjusted profitability as it reaches a more efficient operating scale. By contrast, Opendoor is still a long way from that point. And in the meantime, Redfin has its own enviable cash horde totaling just over $1 billion, offset by convertible debt of $488 million.
And though it's a fraction of the size of Zillow and still a young firm just beginning to turn the corner from losses to profits, Redfin actually trades at a discount to Zillow by some measures. As of this writing, Redfin stock trades for a respective 5 times and 69 times 12-month forward sales and enterprise value to EBITDA -- compared to 6 times and 61 times 12-month forward sales and enterprise value to EBITDA for Zillow. Opendoor trades for a similar forward price-to-sales ratio (extrapolating its $600 million to $625 million in expected revenue in Q1 2021 for the whole year) as Redfin, but EBITDA profitability isn't expected yet as it tries to rebound from a dismal 2020.
Put another way, Redfin is on pace to become a highly profitable company even though it's a fraction of the size of Zillow and doesn't need sales recovery like its peer Opendoor. I think this is an underappreciated value in the residential real estate technology front.
