Redfin (RDFN -2.70%) is a real estate brokerage and technology platform looking to redefine how homes are bought and sold. With its employed Redfin Agents and internet-scaled marketplace, it is able to offer lower listing and commission fees than traditional real estate brokerages, saving customers thousands of dollars in the process. This disruptive model has enabled the Seattle-based business to grow substantially over the past few years. But it looks like the company is just getting started. 

Where will Redfin be five years from now? Let's take a look and see if we can answer that question.

The front of a house with a for sale sign in the lawn.

Image source: Getty Images.

Higher market share

If Redfin is to grow its business, it will need to continually win customers from traditional brokerages. The best way to track this progress is to look at Redfin's market share of U.S. homes sold, which management provides to investors each quarter. In the first quarter of 2021, Redfin's market share was 1.14%, up 0.21% -- or 21 basis points -- from the same period a year ago. 

Going back further, in Q1 of 2018, Redfin's market share was a mere 0.73% in the United States, which shows that the company has consistently made progress in disrupting the industry over the last few years. Five years from now, investors should expect Redfin's market share to be considerably higher than the 1.14% it is at today.

Expanded offerings

Redfin wants to bring a better value proposition to its customers by going into more parts of the real estate industry. This includes Redfin Now, its iBuying product where the company buys homes itself, taking out any middlemen from the typically arduous homebuying process. It has major competitors within iBuying, including internet marketplace brethren Zillow (Z -3.18%) (ZG -3.26%) and recent IPO Opendoor (OPEN -3.41%), so it will be interesting to see how the industry plays out. In Q1, Redfin Now brought in $92.7 million in revenue. However, the segment has extremely low gross margins, which were 1.7% last quarter.

Within its core brokerage business, Redfin is moving into different niches. This includes Redfin Premier, which is a new segment focused on catering to the luxury home market. Redfin Premier will be for homes worth over $1 million, have access to high-definition video tours, and preferential access to top agents. Luxury homes are a small part of Redfin's business right now, but management says it wants to grow it quickly by offering a better-catered product to these high-value customers. 

Redfin Mortgages, the company's unit that originates mortgages for its customers, grew 200% year over year in Q1. Redfin has an advantage in offering mortgages (which is mostly just a commodity product) because it already has a relationship with homebuyers on the Redfin platform.

Lastly, Redfin just closed its acquisition of RentPath to help it enter the rental real estate market. RentPath owns different rental websites like Rent.com and ApartmentGuide.com, which in aggregate get around 16 million visitors each month. With this acquisition, Redfin hopes to offer value for renters and people selling rental units online. It hopes to integrate RentPath's properties onto its own marketplace sometime in early 2022. 

These investments in new real estate businesses will be paid for by the profitable brokerage segment, Redfin's original product. The unit is generating a growing amount of gross profit each quarter, hitting $40.4 million in Q1. 

Consistent profitability

One knock against Redfin has been its inability to generate a consistent profit. If we look at the cash generated from operations over the last few years, Redfin has never been able to sustain profitability for an extended period of time. This isn't necessarily a bad thing, since the company is investing heavily into the new initiatives mentioned above. But if you are an investor in Redfin, you should expect the company to have a strong record of profitability and cash generation five years from now if it continues to grow and its initiatives pan out.

RDFN Cash from Operations (Quarterly) Chart

Image source: YCharts.

What it means for the stock

Even though it is well below the all-time high it hit this February, Redfin stock still trades at a premium valuation. At a market cap of $6.6 billion and with a trailing-12-month gross profit of $261.6 million, the stock trades at a price-to-gross-profit (P/GP) ratio of 25.2. This is expensive relative to most other stocks on the market. 

However, Redfin has a clear path to grow within its industry, so this high price may be justified. If it continues to grow its brokerage business and is successful with most of its other initiatives, its annual gross profit could hit over $1 billion within the next five years, with net profits and cash generation much higher as well. If you believe Redfin can hit these financial levels, the stock will likely garner a much higher price five years from now.