Redfin (RDFN 19.93, +1.60, +8.76%) has come
a long way since it went public back in July of 2017. At that time, the company
was mostly known for its very popular real estate website and the "Redfin
Estimates" it generated through the vast amount of housing data it
gathered and analyzed. Since its IPO, RDFN has slowly and steadily become a
more formidable player in the brokerage industry, utilizing its
bargain-basement 1% listing fees and widely-used website as levers to capture
However, RDFN isn't just looking to transform the real estate brokerage industry through lower fees and better technology. The company has much more ambitious plans, looking to become a full-service company that assists customers through the entire moving process. This includes its "Concierge" service in which it repairs, cleans, and spruces up homes before listing them for sale; its Redfin Mortgage business, which is expanding into new markets this year; its Title Forward business; and Redfin Now, in which the company buys properties directly from customers and re-sells them.
Building each of these services up requires heavy investments which helps explain why the company is still far from reaching profitability. Furthermore, the company is still battling market awareness issues in its core brokerage business, so it plans to significantly ramp up its advertising efforts this year. It is looking to spend between $37-$47 mln in offline advertising in 2019, as compared to $12 mln last year. These ads will run in 1H18, with expenses weighted more towards Q1 than Q2.
As a result, investors shouldn't expect RDFN to turn a profit any time soon -- analysts are expecting a GAAP loss of ($0.89) this year. But, the early successes in these new programs is encouraging, potentially positioning the company to be a true game-changer in the real estate brokerage industry.
Review of Q4
After the close last night, RDFN issued upside Q4 results, posting a loss per share of (0.14) vs. the ($0.19) consensus, with revenue increasing 29.5% year/year to $124.1 mln, also ahead of the $117.2 mln expectation. Since its IPO, RDFN has never missed analysts' EPS expectations and has only missed on the topline once, by a very marginal amount.
The company’s steady revenue growth rates which have fluctuated in a tight 30-35% range in the seven quarters since its debut. This level of consistency and outperformance in a rapidly changing industry like real estate is noteworthy and speaks well to management's solid execution.
As we noted above, RDFN has been gradually gaining market share each quarter and Q4 was no exception as it picked up 0.10 percentage points year/year. For a reference point, in its first quarterly report as a public company, it reported market share of 0.64%, an all-time high at that point. With RDFN now accelerating its advertising spend, we'd expect its market share gains to be a little more substantial in the coming quarters.
Breaking its results down by segment, its core brokerage business increased by 13%, which is a sharp deceleration from last quarter's 30% growth. The slowdown was mainly due to the softening real estate market, especially in the coastal cities where RDFN has the most exposure. The good news, though, is that the company sees conditions brightening with more supply coming online in the coming months. We discuss its housing market outlook in more detail below.
The downturn in its brokerage business was offset by strong growth in its other segments. Most notably, Redfin Now revenue surged to $22 mln from $5 mln (+340%) in 4Q17. When the company first launched this business in 2017, RDFN considered it an "experiment." Before investing more heavily into it, RDFN dipped its toe in the "flipping" market to see if could be financially viable. Since then, Redfin Now has gone from an immaterial business to one that accounted for nearly 6% of revenue in Q4.
Its other businesses, which include Mortgage and Title, are still pretty negligible at $2.5 mln for the quarter (+32% yr/yr), but, like Redfin Now, these segments should become much bigger contributors over the course of the year. On that note, the company is planning to hire more local mortgage advisers in markets including Chicago, Austin, Houston, Virginia, and the suburbs of D.C.
Outlook & Housing Market
In its earnings press release, RDFN issued upside revenue guidance for 1Q19, forecasting $101.5-$105.1 mln vs. the $103.4 mln consensus, representing annual growth of 27-32%. Of this amount, Redfin Now is expected to consist of $15-$16.5 mln in revenue, which would be a meaningful increase with total percentage of revenue at about 15%. Naturally, the company will need to increase its capital limits to achieve this level of growth, which it plans to do, lifting its commitment to $50 mln from $35 mln.
Net loss is anticipated to widen considerably to ($69.2)-($67.8) mln from ($36.4) mln in 1Q18. Again, this is attributable to the ramp up in advertising spending as the company looks to spur more market share gains, as well as increased investments across its newer business segments.
With the stock up 6% this morning, investors clearly aren't overly concerned about the lack of profitability at this point. Instead, investors are focusing on its growth potential as it becomes even more aggressive in its goal of becoming a "one stop shop" through the moving process.
Management's reassuring comments regarding the housing market have put investors in a bullish mood. Specifically, during the earnings call last night, RDFN reminded participants that last quarter it argued that the housing market was weaker than many people realized. While there is still some regional weakness due to weather factors in the Midwest, RDFN stated that homebuyers seem more confident now than they were in 2H18.
The company expects that the supply of homes for sale to increase, providing buyers with more options, but not at a rate that will cause prices to drop too sharply. For instance, the number of homes for sale on February 1 was 5% higher in 2019 than 2018, but was still 11% below the 10-year average. Agents report that homeowners from last year who wanted to wait for a better market are now coming back.
RDFN's impressive results and upside guidance illustrate that the company continues to be a disrupter in the real estate brokerage industry. Its cut-rate fees and market leading site are resonating well with home sellers, but, RDFN still faces an uphill climb in terms of market awareness. However, the company believes that now is a good time to hit the accelerator in terms of marketing. Simultaneously, RDFN will seek to bolster its investments across its RedFin Now and Mortgage businesses as those have shown a lot of promise. What really stood out during the call was the company’s encouraging commentary on the housing market. Management seeing these headwinds easing provides another catalyst for the stock today.