In one year, Redfin (NASDAQ: RDFN) went from massive uncertainty over its future to booming beyond all possible expectations. As the residential real estate market continues to see record highs in sales volume and prices, it appears Redfin is well-positioned to benefit from the unparalleled demand while continuing to innovate new, more efficient long-term real estate solutions and services for its users. Let’s take a closer look at where Redfin is today and if the company is a buy.
Stable growth, but profits are lacking
Redfin is one of the largest online real estate brokerages (Redfin Brokerage) focused on being an all-in-one online solution for homebuyers and sellers with iBuying (RedfinNow) and construction services (Redfin Concierge Service), lending (Redfin Mortgage), and title solutions (Title Forward) in 95 markets across the U.S. and Canada.
In 2020, Redfin made up 1% of the U.S. market share for homes sold, producing $886 million in revenues from its varied online services, a 14% increase from the year prior. However, despite a strong year and consistent growth over the past five years, the company is still operating at a net loss. But the extent of the net loss is improving. Net loss per diluted common share was $0.23 for the year ended 2020, compared to $0.88 for 2019.
The company's gross margin improved from 29% in 2019 to 36% at year-end 2020, but it's still well below the industry average of 40.9%. Total operating expenses increased year over year; however, its share as a percentage of revenues improved by 3%, with total operating costs making up 26% of revenues.
Is Redfin a buy right now?
Buying a company that operates at a net loss isn't out of the norm when it comes to buying stocks. Obviously, buying profitable companies is the end goal, but what matters during this growth stage is the stability of the industry and the viability of the company's business in that industry. Right now, the real estate market is on fire, which is doing wonders for the company's revenues, but as the coronavirus pandemic showed us in 2020, the market can turn at any moment and create a lot of uncertainty over the ability of the company to continue operating during a down market.
Growth potential is the endgame for investors considering Redfin. Its services are in demand, and its steady increase in market reach and revenues proves its model works, but the breaking point at which the model will be profitable and if the model is profitable in the long term is still unknown.
Redfin recently purchased RentPath for a total of $608 million. This acquisition will help Redfin further its reach, providing services to renters and competing with the two largest real estate websites that exceed Redfin's current 44 million-plus user reach. Share prices have skyrocketed over the past year as the real estate market took off, up 111% from pre-pandemic highs, meaning it's not exactly a value buy at the current moment.
Personally, I think Redfin has room to grow as the market continues to see record-high demand and digital solutions like the services it offers become more popular, but it's operating at a loss in a volatile market. Redfin could pay off big for a patient investor but not without a lot of risk in the meantime.