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Redfin Is Overvalued

Mar. 06, 2018 1:50 PM ETRedfin Corporation (RDFN)31 Comments


  • Redfin's 180-day IPO lock-up has expired.
  • Per its S-1, private equity and insiders have a cost basis under $3 and collectively own nearly 70 million shares. Redfin also has 8.75 million of vested options.
  • Redfin's underlying business is real estate brokerage and revenue growth is slowing. The business isn't scaling.

On January 10, 2018, on Market Adventures, I wrote a short piece about two companies with fast approaching 180-day IPO lock-up expiration dates. The two stocks in question were Roku (ROKU), then trading at $44.73, and Redfin Corporation (NASDAQ:RDFN), then trading at $26.93 (see here). Of course, there are no free lunches in finance and the more obvious shorts, like these two stocks, tend to have high short interest and therefore the puts for both were and remain very expensive given the high implied volatility. Therefore, you can be right about the stock declining and still lose money on your put option, so you need to be precise when it comes to timing.

In today's write up, I want to discuss Redfin.

Elevator Pitch - Short Thesis

Redfin loses money and the business model isn't scaling. Revenue in its core brokerage business is decelerating, Q1 2018 guidance missed consensus estimates, the 180-day IPO lock-up is over and insiders can start selling their low cost shares, and the company's fully diluted market capitalization is $2.08 billion.

Moreover, as I noted in the January 10, 2018, piece, private equity and insiders own their stock with a cost basis under $3.

Source: Redfin's S-1


Even though I liked Redfin as a short in the mid to high $20s, in early January, we wanted to wait to purchase puts until after 180-day IPO lock-up expiration and after evaluating February 22, 2018, Q4 2017 earnings.

In terms of earnings, Q1 2018 guidance trailed analyst expectations. The conference call also contained refreshing candor that nonetheless was bearish as there's tangible evidence that revenue growth rates are decelerating. However, before we dive into the fundamentals and valuation, I want to circle back and highlight the dramatic amount of stock supply, post the 180-day lock-up.

Share count

This article was written by

Courage & Conviction has been investing for over twenty years and has spent five years working as a buy-side analyst within a $45 billion investment-grade bond department, 3.5 years as an energy analyst, in addition to various other corporate finance roles. He has been a full time investor and author since 2020.

He leads the investing group Second Wind Capital, providing in-depth analysis on under-the-radar smallcap value ideas. He shares his real-money portfolio and does research based on fundamentals, synthesizing industry ecosystems and regularly interviewing management teams. He teaches community members to embrace volatility and exercise patience to drive alpha creation.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in RDFN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (31)

12 Mar. 2018
I don't have an opinion on redfin yet but the current system seems weird. Whether you sell $100k apt or $1mil apt, isn't the amount of work the broker put in the same? Yet, brokers get paid more to sell the more expensive apt for the same amount of work. It just seems like the high end property market is ripe for disruption for that reason.
That’s still 20k cheaper on a 1 million sale price. Why is so much money going into robo advisors and etf’s . The cost is lower. Taxi vs Uber, etc etc . I’m in it for the long term. Same business model as Netflix.
Courage & Conviction Investing profile picture
I too live in the burbs of Boston. We used Redfin to sell our condo and buy our house. Our real is one of the top agents for Redfin in Boston. The experience was good and she is excellent. That said, how do RDFN make money? The 1.5% is for them and the other selling agent sets 2.5%. So it is 4% vs. 5%.....
BahamaBen profile picture
Not only does REDFIN cost less, but the service is AMAZING! They could charge MORE than a typical RE agent and still grow. But, REDFIN has ethics and morals. They are not in this for $ only. That commitment to the consumer will make them grow. The future is coming fast and REDFIN will lead it!
Rookie47 profile picture
With less than 0.7% of the market, this to me shows an amazing opportunity to invest knowing intimately the software and the business model. Traditional agencies simply cannot compete with 1% commission. They are scrambling. It’s only a matter of time before the old goes out and the new comes in. So ya go ahead, short it and make money in the short term but I wouldn’t hold short for too long. The aggressive ad campaign is not a super long term play. They will desperately try to make Redfin a household name then they’ll scale back and reap the benefits when their market share goes from 0.7% to 1 to 2%. The only reason it’s taking longer to grab more of the market share is because of the sheer volume of traditional agents. Every family has an agent in their midst. So ya, the obligation to have your relative to sell your Home is their no.1 competition at this point IMO. Also, I think people still think they’re a discount agency and you won’t get max amount if you hire them to sell your house. But again, it’s just a matter of time. Not to mention them getting into the mortgage business and maybe splash an ad or two on their map, which btw is far superior to Z’s. Like I’ve said before, they are amazoning the real estate market. Trust me...
I live outside Boston and Redfin signs are popping up everywhere which got me looking at it. They are only in 80 major markets and will continue to grow via a website just like amazon and Netflix. Young people buy everything online and research via the web. I’m moving south in 5 years and faced with selling at 6% or 1.5% most people will choose 1. I’m a long term holder. We will see if most people choose to pay 6% commission.
Courage & Conviction Investing profile picture
Stockjerk - meaning you can't get any borrow from your broker?
No shares for shorting, looking at options.
Convoluted profile picture
I would sell options because you put the clock on your side. The holder of a long call MUST have a decisive forward move to beat the clock.
But, the bid-ask is not very tight-probably reflecting a diminished volume in shares.
I shorted at a higher price point, when the animal spirits were raging against the moon.
I have been in touch with traditional realtors also. A good portion of them envy the Redfin structure. Insurance, steady pay check, customers coming to them. The average agent closes 3 times as many homes. And they do feel the crunch when asked "will you give me a rebate when I buy like Redfin?" Of course they will not.
Convoluted profile picture
"A good portion" =xn
x/n=average of what sample.
I would rather close 1 $1M home, than 60 $100k homes @ 1%. Or, I guess it would be 3%, so make it 30 homes.
One file vs 30!!
It's part of the marginal cost society-roger that.
BUT, look at average return on your time. I sell the McMansion (or shack depending on location), and play golf while our 1% grunt is, well grunting away. What about the psychosomatic issues. No time for little Tim. He joins a gang, and ends up in prison-for lack of parental time. "I really don't have time, son..."- Cat's in the Cradle
To bring you in the know. The agents do not work for 1%. They are paid a salary and then bonuses on Survey results. They are employees with a 401K, insurance, expenses etc paid for. The agents I know make 6 figures plus. Not bad for a "grunt" You should get the facts before speaking. Yes maybe more hours of work, less stress and the $1MM homes do come their way. And to be clear Redfin does not handle the $100K homes, those go to partner agents.
Of course they would rather sell one mansion. Who wants to work right? But it's the buyers and sellers that dictate that. As more and more buyers and sellers use RDFN, all of the sudden, traditional realtors will need to adapt. They will actually have to do some work to stay competitive. There are so many realtors in my area now, I'm not sure how they all survive as it is. And yes I wouldn't expect older people to use RDFN. But each and everyday there are fewer of them yet more of the younger demographic.
Courage & Conviction Investing profile picture
Well balance commentary, Convoluted.
Convoluted profile picture
When I hear the magical phrase “we have a new, disruptive technology”, I confess that I’m like Pavlov’s pooch. So, as soon as options traded, I put on a large (very large) bear call spread. It was rather profitable. I did the same thing with DANG, RENN and countless others.
When I shorted RDFN, I admit that I had little insight as to their business model. What I do know is that real estate transactions go back centuries, and changing eons of deeply ingrained cultural DNA by claiming to possess a magical new “platform” struck me as arrogance squared.
But, I see that there are several comments falling on the positive side, so I called a realtor I’ve dealt with for some 30 years.
‘I assume you have some familiarity with RDFN?’
‘Not really-other than its another internet site pulling data from MLS, and offering kickbacks.’
‘Is it disrupting your business’, I asked.
‘Not at all-but it might appeal to some folks that don’t have established business relationships.’

So, I guess that the people I know are not likely to be’disrupted’ anytime soon. Recently, my partners and I started looking for a couple hundred acres off I-85, and we didn’t think to call RDFN.

Of course, I’m old and out of touch, so pay me no mind. Yet, when I try to be open-minded, I can’t fathom an agent working for 1%. So, I search for historical analogy for some similar service that requires a bit more professionalism than selling socks over the internet.
Well, good ol’ Joel Hyatt comes to mind. Remember Hyatt Legal Services?
Redfin needs to partner with new home builders and they haven't huge missed opportunity to grow volumes
Wait for 12$ price to buy long
BahamaBen profile picture
This ended up almost being a great call! Almost hit 12$
I believe in this company. software is the best. can book appointments instantly, benefits buyer and seller side, huge possible potential to streamline mortgages too
MonsieurAlex profile picture
Seems like a piece to short amazon before t hit $1,000 or Netflix before $100 for that matter. Long $RDFN.
Stanward99 profile picture
I am long RDFN but most of the money i have made has been selling Options, Puts and Calls , i am also long a put
It seems as though all the negative talk in the beginning has been proven incorrect. Who ever thought a salaried Real Estate agent could ever exist? Redfin (10 years later) has shown that is possible. The agents are earning more respect from traditional agents as time goes on. They truly work for the customer. Redfin is extending it's footprint and will continue to grow. Competitors are using Redfin's website for a more up to date picture.
Give it more time and 2 years from now you may be wishing you had bought some stock. They are in this for the long haul and $26 per share is not out of the realm.
06 Mar. 2018
nothing insightful, this has been priced in...long term play with good traction...traditional brokerage houses hate redfin, just like how taxi companies hate uber....get in early
These are all the arguments for not buying amazon after there ipo. Don’t make money, hard to scale business ,and low margins. Drive around and see the signs and they are only in 80 markets. Remax is at $50 with a lot more overhead and expenses. We will see!
Can’t take C&C analysis too seriously after his calls on RRC, GNC, and DAVE to name a few
not that CCI needs anyone to "defend" him, but,
GNC and RRC have yet to be written from an investor's point of view.
there is a LOT more to analysis than short term results.
Courage & Conviction Investing profile picture
Frog - On my Marketplace, at 8:45am, I said to buy /symbol/MED, limit $76 in pre-market. The bid then was $75.15 and ask was $76.80. We missed it by $0.80. Turns out, it hit $89, in regular trading.

Made the same mistake with /symbol/DIN. We bought it at $54, after earnings, and flipped it at $58. It hit $80, a week later!


BTW - we bought RDFN puts, yesterday, before the close.
this is a TOUGH BUSINESS!!!
the only thing in life that counts is NOW!!!!!!!!!!!!
one of the few things i credit Cramer with is his saying
"there's always a bull market somewhere".
the market does NOT CARE what you or i or anyone thinks
or does. the market is driven by sentiment. i have found that
fibonacci entrance points work well. exiting at "peaks" is just
too tough for me to do optimally(in retrospect).
if you let the market drive you crazy,IT WILL!!!
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