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1 Real Estate Growth Stock to Buy Right Now

By Anthony Di Pizio – Aug 19, 2021 at 10:29AM

Key Points

  • Redfin is crushing its quarterly results, but the long-term story is just as impressive.
  • Amid the housing boom, more consumers are turning to the tech company to sell their homes.

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This innovative tech company is transforming real estate sales, and bringing fees down in the process.

The U.S. housing market just surpassed $36 trillion in total value after its biggest year of growth since 2005. Consumer demand has been driven by record low interest rates and aggressive government stimulus programs designed to combat the pandemic, and tech-based realtors are reaping the benefits.

Redfin (RDFN 7.20%) aspires to change the way houses are bought and sold by using an army of employed real estate agents, complemented by a blossoming direct buying business. It has successfully saved sellers over $1 billion in listing fees, the company claims, simply by leveraging its size and scale to out-price independent brokers.

Homebuyers are turning to Redfin in bigger numbers, sending its share of total U.S. home sales consistently higher, which makes it a great bet for the future. 

A real estate agent handing keys over to a young family in front of a sold sign and their new house

Image source: Getty Images.

A blockbuster second quarter

Redfin announced its second-quarter results on Aug. 5, and while you shouldn't place too much emphasis on one quarter, it delivered some eye-popping numbers. 

Metric

Q2 2020

Q2 2021

Change

Revenue

$213.6 million

$471.3 million

121%

Gross profit

$46.0 million

$126.1 million

174%

U.S. market share by value

0.94%

1.18%

24 basis points

Data source: Redfin.

The company's broking segment makes up the higher portion of total revenue at 63%. It's the service side of the business that focuses on the traditional real estate sales process using over 2,450 Redfin lead agents. 

The product segment represents the direct buying business, where Redfin purchases homes from sellers with the intention of reselling them for a profit. While it's the smaller piece of total revenue, it's growing above trend at 138%, and in Q2 it bought 40% more properties than it did for the whole of 2020. 

The company still operates at a loss because it's focused on growth -- the business of charging lower fees in real estate, which is traditionally a labor-intensive industry, only works on a large scale. However gross profits are climbing rapidly, which affords Redfin the flexibility to pare back costs in the future to deliver positive earnings. 

But most importantly, its plan is working, with a growing share of overall U.S. home sales flowing its way.

A long-term play

The real estate industry was due for disruption. Even though the internet boom happened decades ago, it's only now that the model is really being shaken up. Consumers don't view their homes as disposable goods, so careful consideration often goes into sales and purchases. 

The thought of transacting with a tech company on such a meaningful life decision may have seemed far-fetched, but it's evident people are warming to the idea for its convenience. By selling your home directly to Redfin, you can guarantee a cash payment and avoid months of open houses and uncertainty.

Metric

2018

2019

2020

2021 (Estimate)

CAGR

Revenue (millions)

$486.9

$779.7 

$886.0

$1,780.0

54%

Data sources: Redfin, Yahoo! Finance. CAGR = compound annual growth rate

Revenue generated by the overall real estate broking industry is expected to grow by just 0.4% in the U.S. this year, so judging by Redfin's CAGR it's clear the company is stealing significant market share from traditional operators. 

But that trend is enforced by the growth in Redfin's share of overall U.S. home sales.

Metric

2018

2019

2020

First Half 2021

Redfin share of U.S. home sales

0.81%

0.93%

1.00%

1.18%

Average monthly website visitors

27.3 million

33.5 million

42.9 million

45.4 million

Data source: Redfin.

The company is likely to soon double the number of average monthly website visitors compared to just a few years ago, highlighting the popularity of its modern approach. 

But Redfin hasn't stopped at buying and selling houses. It's on a mission to dominate the rental business, too, starting with acquiring RentPath in April for $608 million in cash. RentPath owns multiple leading rental websites with 16 million monthly visitors that will now be introduced to Redfin's brand through a mutually beneficial integration.

Why you should buy it

There has never been such a unique way to get exposure to the growth of the real estate market, and Redfin's technology is highly scalable. While Redfin has some key competitors with a similar vision, they tend to be more focused on the direct buying segment, and none of them have the agent-driven sales model that Redfin does. 

Competition might be fierce in direct buying, but on the broking side, Redfin is competing with traditional operators that often charge listing fees more than twice as high -- giving the company a significant advantage to continue taking market share.

And while growth has been incredibly strong so far, in 2022 analysts expect revenue to be 31% higher than the lofty 2021 estimates. With a market capitalization of just $5.1 billion it would place the stock at just over two times sales, and that could represent significant long-term value. 

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Redfin. The Motley Fool recommends the following options: short August 2021 $65 puts on Redfin. The Motley Fool has a disclosure policy.

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