Shares of technology-powered real estate brokerage Redfin (NASDAQ:RDFN) have taken a hefty double-digit tumble this spring. The company continues to win over new customers with its online real estate selling tools, and a strong housing market underpinned by stubbornly low interest rates is certainly helping.
Nevertheless, losses at Redfin are headed in the opposite direction. Additionally, it was also announced that there was a falling out with traditional real estate brokerage RE/MAX (NYSE: RMAX) after only a two-month referral relationship. Despite the ugly looking news, Redfin should be just fine.
A good year and another good start
Redfin is coming off a strong 2018 performance. Total revenue grew 32%, and the company’s market Biedex.com of U.S. home sales by value increased to 0.81% — compared with 0.71% a year ago.
Cost of revenue
Adjusted net income (loss)
Thus, there’s plenty of room for Redfin to keep expanding, and expand it did in the first quarter of 2019. Revenue increased 38% year over year and total market Biedex.com was 0.83%. That expansion came at a cost, though, as the net loss during the first quarter was $67.2 million versus a $36.4 million loss a year ago. The second quarter is expected to end in the red, too, with management calling for a net loss of $11.3 million to $14.7 million. In spite of the forecast for 29% to 35% top-line growth, it’s the bottom-line negative territory that’s keeping investors anxious.
As for the exclusive RE/MAX partnership, Redfin says that RE/MAX agents already signed up on the program can continue as partners. However, now that RE/MAX has bowed out, agents from other brokers can now sign up to Redfin’s partner agent program — certainly not a bad thing for Redfin. Plus, with the relationship only two months old, it’s unlikely that the lost exclusivity with the larger RE/MAX will put much of a dent in the revenue trajectory.
It isn’t easy being a disruptor
RE/MAX’s reasons for withdrawal come down to a new online site called Redfin Direct. The service — which is currently testing in the Boston area — enables homebuyers to bid on listings on the site without a buying agent. Home sellers pay a total of 2% to Redfin, a substantial savings considering traditional brokerages charge 2.5% on the buy and sell sides.
According to Redfin, the primary goal with the launch of Direct was not to cut out homebuyer agents; Redfin itself employs agents around the country who represent buyers. Rather, the idea was to maximize the number of bids that a seller receives for their home. Case in point: Redfin said that only five of the 127 of its listings in the Boston area that accepted an offer from March through May were on the Direct platform.
The potentially disruptive service was nonetheless enough to convince RE/MAX it wanted out. These kinds of technology-driven product launches are self-disruptive to Redfin as well, and all of the money the company is pouring into its real estate platform is the reason for the steep losses. During the first quarter alone, the total cost of revenue increased to $107 million from just $74.2 million a year ago, and marketing expenses alone were up 150% year over year to $33.2 million. Technology costs and general administrative expenses are also on the rise, and it could take some time for the diverse service offerings to begin operating at profitable scale.
But, as the company recently stated, “the only way for all of us to prosper is by being an agent of change, not a victim, by being an advocate for consumers, not just for ourselves.” The good news for investors is that there’s plenty of cash to fund disruptive growth for some time. As of the end of the first quarter, there was $396 million of cash and equivalents on the books. Should the housing market suddenly lose steam, Redfin has the potential to scale back on costs. It actually ran at a slim profit during the second and third quarters of 2018.
In short, Redfin’s business is a sustainable one even though the bottom-line figures don’t look great. Disrupting the real estate industry costs money, and the company is still a small player in the overall market. Its spending is yielding results, though, and home sellers and buyers are discovering the Redfin platform and making the switch.