1 Growth Stock With 122% Upside, According to Wall Street

The total value of the U.S. real estate market is in the vicinity of $40 trillion right now, with a growth rate of 19% over the last 12 months, according to the most recent Case-Shiller National Index data for October 2021.

It's understandable that investors would want exposure to such a large, booming market, and real estate brokerage stock Redfin (RDFN -2.81%) might be a great way to get it. The company is building scale and reducing fees for its customers, and its growth rate is soaring.

The company's stock trades at $28.73 right now, but the consensus price target on Wall Street indicates significant potential upside from here. Here's why.

Image source: Getty Images.

Redfin operates in two segments of the real estate industry

Redfin is first and foremost a real estate brokerage enterprise, except it's focused on building a nationwide footprint as opposed to the traditional model, which typically involves small, independent offices covering narrow areas. 

By approaching the broking business at scale, Redfin is able to charge significantly smaller listing fees of 1%, compared to the industry average of 2.5%. Since the company's inception, it estimates it has saved its customers over $1 billion using this model. It's a win-win arrangement that has seen Redfin's market share of total homes sold in the U.S. grow to 1.16% in the recent third quarter of 2021, from 1.04% in the prior-year period. 

But Redfin operates a second segment known as iBuying, which involves the company directly purchasing homes from willing sellers and flipping them for a profit. It's an attractive proposition for sellers, because it means an instant sale and guaranteed payment without the hassle of open houses. But it's a business that carries substantial risk, as Redfin's direct competitor Zillow Group (Z -1.10%) (ZG -1.10%) learned. That company recently exited the iBuying segment after suffering losses on a portion of the homes it purchased, highlighting the importance of being extremely selective.

Redfin's iBuying segment operates on a break-even basis, which means it neither makes money nor loses money. But since customers appear to like it, it's worth doing so they don't end up in the hands of a Redfin competitor.

Redfin is seeing rapid growth

Redfin's increasing popularity is evident in its soaring revenue. But the metric has received a helpful boost from broad strength in the U.S. real estate market over the last five years, which grew by 48% between January 2017 and October 2021 -- or a compound annual rate of 8.4% -- according to Case-Shiller data.

Since Redfin charges a flat listing fee of 1%, its revenue increases in dollar terms if the houses it sells are rising in price over time.

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

As the company continues to build scale, its loss per share is also trending toward zero, which indicates it could be profitable in the next few years. It would be an added bonus if Redfin could turn a gross profit in its iBuying segment, since it accounted for 44% of total revenue in the most recent quarter. However, it must be careful to ensure it's not overly aggressive in doing so, in order to avoid a similar fate to Zillow. 

Wall Street is bullish on Redfin

When 13 Wall Street analysts offer their price targets on a stock, and those targets combine to deliver a consensus that indicates enormous upside, it can be worth paying attention to.

That's the case here. Five analysts have attributed a buy rating to Redfin's stock, and eight analysts have attributed a hold rating. But the average of their price targets is $64, indicating they believe Redfin's share price could soar by 122% from here.

Right now, the stock trades at a forward price-to-sales multiple of just 1.2 based on 2022 revenue estimates. By comparison, Zillow's stock trades at a more expensive multiple of almost 1.9, and that company has now exited its iBuying business, which was key to its momentum.

By all accounts, Redfin stock looks like a great value here, and Wall Street's bullish price target certainly backs that up.