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Redfin: Expected return with limited growth in market share (NASDAQ: RDFN)



Investors have piled on virtually every stock with a strong digital theme this year, including Redfin (RDFN). Real estate in the new age, which made waves in the industry by cutting fees for sellers and agents to 1.5% (against the standard 3.0%) and by emphasizing its technology-based features such as digital closures and virtual tours has been one of the hottest Shares of the year, with shares more than doubling so far today. Now, however, Redfin has the challenge of justifying the huge price gains – and after somewhat slippery results from the second quarter, some investors may start asking questions at the meeting.

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Data by YCharts

The basic argument for Redfin this year was that of all the real estate in the United States, Redfin would be the biggest winner of coronavirus thanks to its technological prowess. Although Wall Street expected revenue in the first and second quarters to be strongly affected by the dramatic decline in real estate activity and the ban on open houses in many markets, the assumption was that Redfin would gain market share . And in his honor, Redfin was among the fastest realtors to respond to the pandemic, stage virtual tours for clients and offer virtual staging packages (where photographers digitally render a home with furniture to the photo set) to sellers for free in an effort to maintain a certain level of market activity in the midst of the downturn. Redfin was also quick to adjust the size of the employment pool, beating up its employees' agents (who, in contrast to the rest of the industry, are directly employed and paid by Redfin instead of on a commission basis).

But surprisingly, Redfin did not gain market share in Q2 – for the first time since the company went public in 2017 (the company limed this up to pandemic impact on the west coast, but for me it is only a partial explanation ). Each quarter, Redfin had reported a small percentage of the gain in market share (for example, in the first quarter, Redfin reported a 0.93% share of US real estate, up 10 bps y / y, while in the 4th quarter it reported a 0.94% share. up 13 bps y / y). Every quarter, there had been a positive historical share of market shares, until the second quarter.

Chart 1. Redfin market share comment Source: Redfin Q2 profit publication

Redfin's market share for the second quarter remained constant at 0.93%, and actually drops 1bp y / y as it faces a tougher FY19 -komp. And while this flat Q2 market share in a challenging macro environment is not terrible in itself, it questions the driving force behind Redfin's YTD rally – was this not supposed to be the brokerage firm that would finally meet traditional competitors in the midst of lockdowns?

Given the stock's already healthy progress this year and no direct signals of fundamental improvements, I would be wary of investing in Redfin right now.

Q2 download

Aside from market share, let's now dive deeper into the rest of Redfin's second quarter update. Take a look at the revenue summary below:

Figure 2. Redfin Q2 results Source: Redfin Q2 revenue release

Redfin's total revenue of $ 213.7 million dollars (+ 8% y / y) Wall hugely beat Street expectations to $ 186.6 million (-6% y / y) expectation, but probably due to the inclusion of $ 72.2 million in real estate (Redfin Now home-selling activities) revenue that is very difficult to predict and highly dependent on the timing of home sales from Redfin & # 39 ;s inventory (we also note that with a 1.6% gross margin on Properties this quarter, Redfin continues to lose money on its home flipping activities even before taking out operating costs for that business).

The company had guided to only $ 61- $ 65 million in real estate revenue for the quarter, so if we take the center of that area and strip out $ 9 million of real estate timing-related overperformance, Redfin's real beat to Wall Street expectations was really about $ 18 million, or about nine points (misunderstand me, it's still a strong blow in a difficult to predict quarter, but just not as strong as the headline figures).

The table below divides Redfin's revenue by component:

Figure 3. Redfin revenue detail Source: Redfin Q2 revenue release

Core brokerage revenue, meanwhile, fell -12% y / y to $ 128.5 million, which was largely as expected as U.S. real estate activity did not choose to back up to back half of Q2.

This is how CEO Glenn Kelman framed the market environment and explained the decline in market share during his prepared remarks on revenues from Q2:

Our market share fell by 1 basis point from the second quarter of 2019. The loss is largely due to the high share of sales Redfin receives from the western part to the USA, which closed almost completely in March and April. But we also need to hire more agents. Our commitment to hiring agents led us to set prices and service levels and safeguard the welfare of many of our workers. But that commitment also limits our brokerage capacity when demand increases, as it did after our reduction in April. The week before we over 36% of our lead agents and laid off another 11%, customer requests were 41% lower than the year before. At the end of June, inquiries increased by 40% from the previous year, which is crazy.

At some point in the fourth quarter, we expect to be fully staffed against our current forecast for 2020 demand and to continue to employ from the point of paying with demand. Since many of the customers we will meet in the fourth quarter will not close with sales until the first quarter of 2021, we may have to wait until the beginning of 2021 to get a share at a historical rate of around 10 basis points per year. "

There is good news and bad news in this treat. The fact that inquiries were strong up in June is a healthy indicator for Q3. But the fact that Redfin is going on a hiring / re-hiring spree ( ends its furloughs), and does not expect to see the gain in market share again before 1Q21, is a difficult story to sell to investors.

The market has become incredibly short-term oriented late, and it takes some time for Redfin to hire and ramp At least in the second quarter, the company's declining brokerage revenues were offset by a reduction in losses thanks to Redfin & # 39 ;s accounts. In the medium term, investors will see growing losses and declining operating margin thanks to uptick in employment – while brokerage revenues and typical 10 bps / quarter market shares will not recover until three quarters from now (but to Redfin credit, Kelman suggested to modest market share gains in the 3rd quarter and 4th quarter, just not at the historical pace of 10 bps / quarter).

Key Roofs

Investors must ask themselves: in the short term, what is the probability of a continued meeting for Redfin? I see no short-term catalysts that can send Redfin significantly higher, especially since Redfin's comment suggests that performance will not pick up until early next year. Steer clear here and invest elsewhere.

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Disclosure: I / we have no positions in the mentioned shares, and have no plans to fill any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with any company mentioned in this article.


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