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Redfin - Two Negatives: Realty And Home Flipping - Don't Make A Positive

Jun. 12, 2020 8:40 AM ETRedfin Corporation (RDFN)46 Comments
Gary J. Gordon profile picture
Gary J. Gordon


  • Realtor Redfin is in a mature and heavily competitive business.
  • In order to gain market share, Redfin crafted a money-losing business strategy that is hard to see turning profitable.
  • On top of this problem, Redfin has added a second unpromising business - home flipping.
  • Despite these problems, investor fantasies have taken the stock to a record high recently.  Fair value is probably below $10 a share.

A few weeks ago I wrote Zillow: The Stock Is A Zell. While researching it I took a cursory look at realtor Redfin (NASDAQ:RDFN). The more I thought about Redfin, the crazier the stock looked to me. I therefore added a Redfin short to my Zillow short. Then, in the best tradition of “Ready, Shoot, Aim”, I actually did some homework on Redfin. Here is the sum of my efforts. No, it’s not War and Peace. But it’s pretty damn close.

My summary argument for shorting Redfin:

  • It is in a very mature and extremely competitive business.
  • Like most other companies who attempt to rapidly grow in a mature business, Redfin crafted an unprofitable business model.
  • Management then added another unprofitable business on top of its core unprofitable one.
  • Overlooking this mess, investors have bought into a fantasy that has recently taken the stock to a record high and well over any reasonable valuation I can come up with.

The stock is $32 a share as I write this. In my opinion, fair value is no more than $10, and probably lower.

What the realty industry looks like.

The demand side. The value of homes sold in the U.S. is about $2 trillion a year. Big stuff. But housing is a mature product, so the growth rate of home sales can’t likely be much different from nominal GDP going forward. Let’s say 4%. Not exactly streaming or the cloud.

The supply side. Here is where all heck breaks loose. I’ll let Redfin’s 10-K do the explaining:

“The residential brokerage industry is highly fragmented, with numerous active licensed agents and brokerages, and is evolving rapidly in response to technological advancements, changing customer preferences, and new offerings. We compete primarily against other residential real estate brokerages, which include franchise operations affiliated with national or local brands, and small

This article was written by

Gary J. Gordon profile picture
Gary Gordon’s career was on Wall Street, where he was a stock analyst covering the housing, mortgage and consumer finance industries. He also served as a U.S. investment strategist and as a portfolio manager. The bulk of his work career was at PaineWebber and UBS. He is now retired. Mr. Gordon is an adjunct professor at Mercy College in New York. He teaches economics on campus and math at prisons (Sing Sing and Taconic in New York). He also presents financial literacy seminars to adults and students. He is on the Board of Hudson Link (college education for incarcerated men and women) and the Baron de Hirsch Fund. Mr. Gordon is married with two young adult children. He has degrees from Colgate University (BA '74, philosophy) and The Wharton School (MBA '77, finance).

Analyst’s Disclosure: I am/we are short RDFN. 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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