Shares of real estate technology company Redfin (RDFN) are trading lower by about 7% in pre-market action following the expiration of the 25-day quiet period. As we discuss in more detail below, a few of the firms publishing initiations today were cautious on RDFN due to valuation as the stock has surged by about 83% versus its IPO price.
RDFN has indeed been one of the standout IPOs of the year. On July 28, it priced its 9.23 million share IPO at $15, above the $12-$14 expected range. It then opened for trading with a 30% pop to $19.56 and shot straight higher over the next few days, hitting highs of $33.50 on August 3.
A sharp pull-back then ensued as short-term traders flipped out of the IPO and locked in gains. Once that initial roller-coaster ride ended, the stock has been a little less volatile, although the past few days have been rather whippy.
Along with Zillow, RDFN is among the most widely-visited real estate sites and is one of the fastest growing real estate-oriented companies around. However, RDFN is positioning itself more as a technology company, rather than purely as a real estate company.
RDFN is really a hybrid though, consisting of an online and offline model, offering updated real estate information using machine learning and proprietary software, along with traditional brokerage services. The site itself is free to use and it has complete access to all homes listed for sale in the multiple listing services (MLS), in the markets it serves. RDFN combines these listings with its artificial intelligence/machine learning technology to provide the following:
- Listing Recommendations: By knowing which listings customers visit online, tour in person, or make an offer on, its algorithms can make better listing recommendations.
- Redfin Estimates: RDFN says that its access to detailed data about every MLS listing has helped it build what it believes is the most accurate home-valuation tool. According to its own study, 64% of the listings for which it provided a public valuation estimate sold within 3% of that estimate. That is compared to 29% and 16% of the public estimates.
- Refin Hot Homes: This proprietary algorithm identifies the homes it believes are most likely to sell quickly. Coupling Redfin Hot Homes alerts with on-demand tours, as well as data it's collecting about offer deadlines, is part of its strategy to give its customers a first-mover advantage in pursuing the most desirable homes for sale.
With this powerful information, RDFN pairs its own real estate agents to offer a service that is faster, better, and costs less. The brokerage side of its business is newer, but, the company is already in 84 markets across the U.S. What's especially appealing to its customers -- and what has been a driving force in its growth -- is that it rebates part of the sales commission when a property purchase is closed. Specifically, the average rebate is $3,500 per sale. Additionally, RDFN already has a lower commission rate than most traditional real estate brokerage companies, at 1-1.5% vs. 5-6%.
Analysts Cautious Due to Valuation
Analysts appear to be in agreement that RDFN's business model is a potential game-changer in the real estate industry and that it is poised to steadily gain market share. However, analysts are taking a more cautious approach given the huge gains the stock has already made. At 5x FY18 revenue, analyst feel the stock is reasonably valued, despite being bullish on the long term prospects.
The initiation that is grabbing the most attention is probably Goldman Sachs Neutral and $20 target, below the current $25.75 price. BofA Merrill also initiated with a Neutral, but, put a $28 price target on it. On the positive side, Oppenheimer initiated RDFN with an Outperform and $31 target.