does Redfin deserve a spot in your portfolio? let's run through the bull in the bear case in
less than five minutes my name is Brian Feroldi and my name is Brian Stoffel
now brian what exactly does redfin do? most homeowners are aware of redfin.com which is
a portal that you can go to to get information on houses so most people probably think of this
company as a competitor to zillow but in fact there are some key differences between redfin
and zillow the key difference is that redfin is a vertically integrated real estate broker they
employ their own real estate agents that are salaried instead of working on commission
zillow will normally kick customers to a separate brokerage where the agents are commissioned
importantly you can also originate your mortgage and have your title put in your name all using
redfin in-house one reason why redfit has become so popular with consumers is because of their
low cost because they offer a salaried model as opposed to a commission based model they can offer
to buy sell and list houses for a much lower cost than their competitors but don't take our word
for it it's clear that this is resonating with customers as the company is gaining market share
having doubled their market share in just five years but it's still just over one percent meaning
the sky is the limit when it comes to runway for growth and that's just the core brokerage business
redfin also recently got into the eye buying business which is a flipping service where they
buy a house fix it and then sell it for a higher price later looking at the company's results we
can see that they're doing very well that blue area is the traditional brokerage business which
is growing at a steady clip and that green area is the eye buying market and you can see that
they're gaining share there as well so what's the bookcase for investors from here first and
foremost this company is vertically integrated that means that they have the technology
and the ability to service those customers all in-house that differentiates them from other
platforms second as we already covered they're wildly popular they are gaining market share
and they show no signs of slowing down anytime soon third because they have a salaried model
not a commissions based model they have counter positioning versus existing brokerage houses
those brokerage houses would have to completely blow up their existing business model in order
to match compete with redfin that would prove to be extremely challenging to do but while brian
and i are both excited about redfin's potential it's really important to look at the bear case
first and foremost this is a capital intensive business specifically eye buying is capital
intensive you are putting down a lot of money to buy home hold it on your balance sheet and hope
that you are able to sell it for a small profit that can be a risky and expensive proposition
because of the capital intensive nature of the eye buying business this company's balance sheet
isn't in great shape it has more debt than cash which could make things precarious if
tough times hit again finally and unsurprisingly the company is losing money it is not turning a
profit eventually it needs to hit the point where it is bringing money in so how did redfin score on
our investing checklists for me this company got a 54. that speaks more to the nature of the business
specifically the eye buying business than it does to the quality of the company itself i recognize
that the sky is the limit for this stock but if you just look at the core business i think it's
pretty risky my framework on the other hand came to a different conclusion which is that
it's less risky part of that is because redfin is going very slow and steady into that eye
buying market and it got a score of an eight and a half which is in my investable range
so what do redfin investors need to watch moving forward first and foremost is we need to watch
those eye buying margins now this is important we don't want to see positive margins that are
getting wider instead we want to see margins that are small and positive why because if they
have very large margins that means that there's probably something wrong with their algorithm
where they're getting more profit for it if that's the case that means when the market swings
and turns they could lose much more than they're ready for so we want to see those margins stay
small either way positive or negative second keep an eye on market share redfin has been stealing
market share in his core brokerage business for years we want to see signs that that continues to
happen indefinitely finally we just need proof that the company can make a profit if they can
do that the business is not only sustainable but its scores on both of our frameworks would improve
overall both of us think that redfin is a fascinating business and as consumers we're
really excited as investors we still have some questions that need to be answered brian's out