The real estate industry is booming as buyers bid up home values and inventory seems to have dried up across the country. Given the $36.2 trillion value of housing in the U.S. alone, this is a huge market for companies that can build a disruptive business model to unlock value for buyers and sellers.
There are lots of ways to buy real estate through public companies, but I think the best way to invest in the market today is through companies using digital tools to disrupt how real estate works. That's why Zillow Group (Z 2.32%) (ZG 2.53%), Redfin (RDFN -1.30%), and Matterport (MTTR -2.33%) are my top real estate technology stocks today.
Zillow is one of the go-to apps for customers starting to look at real estate. The company pulls together listings from the Multiple Listing Service across the country, provides data on home sale values, and even gives a live "Zestimate" value estimate of most homes.
The company's main business is selling advertising space to real estate agents trying to reach buyers, known as the internet, media, and technology segment (or IMT). In the second quarter of 2021, this segment's revenue jumped 70% versus a year ago to $476 million, and net income before taxes was $134 million.
I consider IMT a cash flow business that will fund the company's truly transformational offering, Zillow Offers. This is where Zillow buys a home directly, using the data it has gathered about home values across the country. It then lists it for sale, sometimes investing in minor fixes. This is part of the company's Homes segment, which grew 71% versus a year ago to $777 million in revenue and generated $71 million in gross profit. Revenue is high because Zillow counts the entire sale of the home as revenue, which is why margins are lower than for the IMT segment.
In addition to IMT and Homes, Zillow has added mortgages, which generated $57 million in revenue last quarter. Management has alluded to adding services adjacent to homebuying and selling like home insurance, title services, and even property management.
As consumers turn to digital services to buy, sell, and maintain their homes, Zillow could generate incredible value in this multitrillion-dollar industry and already has a big lead in building a real estate juggernaut.
Rather than completely upending real estate, Redfin's start was using digital tools to make its real estate agents more efficient in the market. The theory was that it would then allow Redfin to offer lower costs than traditional agents and take market share in the process.
You can see below that the strategy has worked extremely well. Redfin generated over $1 billion in revenue over the past year, although it's near breakeven on the bottom line.
In the last few years, Redfin has added what it calls RedfinNow, which is a similar business model to Zillow Offers. The segment that includes RedfinNow grew an incredible 139% in the second quarter to $172.4 million in revenue.
As it expands services, the company is also adding title and mortgage services to the business across the country. This may be a smaller company than Zillow today, but it's building a formidable offering and has a path to be a huge brand in real estate.
Instead of buying and selling real estate, Matterport is a real estate technology company that generates data about a building. The company is building what's called a spatial data platform by aggregating spatial scans of millions of buildings around the world. With those scans, customers can place digital furniture, mock up renovations, digitize current assets, and more.
Matterport itself is a platform company because it's building tools that others will build on top of. For example, you can take a Matterport of your home today and send it to a contractor or real estate agent. But the true value will likely be unlocked by companies building productivity tools for real estate. That might be for architects, contractors, real estate agents, insurance companies, or anyone else who deals with real estate.
This is a new stock to the market, but Matterport is growing quickly. Total revenue was up 21% in the second quarter of 2021 to $29.5 million, but subscription revenue jumped 53% to $15.3 million. Subscriptions, rather than hardware sales, are really where Matterport can unlock value in the long term.
Matterport is a high-risk, high-growth stock, but it has the opportunity to transform multiple areas of real estate. The company is effectively digitizing real estate, and that could make most interactions in the industry more efficient. And that could create incredible value for investors.
Real estate technology stocks have a bright future
There's a lot of potential disruption coming to the real estate industry as technology becomes more available. Companies trying to make real estate transactions more seamless like Zillow and Redfin have the opportunity to be disruptive, and Matterport is bringing a new kind of data to the industry.
Given that this is a multitrillion-dollar market, there's a lot of potential for businesses that can build a successful market. And these are the three stocks that I think have the best chance for success.