Sales Force Expansion And Zillow Partnership Will Open Future Markets

Key Takeaways

• Redfin's expansion and partnerships boost agent numbers, enhance revenue, and strengthen its market position through increased advertising and profitability.
  
• Strategic cost reductions and improved monetization strategies aim to significantly enhance margins, profitability, and earnings across all segments.
  
• High advertising spend and reliance on partnerships pose risks to Redfin's margins and growth amid challenging market conditions and elevated interest rates.

Catalysts

Operates as a residential real estate brokerage company in the United States and Canada.

• Redfin's expansion of the sales force and shift to the Redfin Next commission-based pay plan has increased the number of lead agents by 25%, which is expected to drive revenue growth as new hires outperform tenured agents and generate more sales.
  
• The rentals partnership with Zillow is projected to double the listings on Redfin's site and provide a substantial upfront payment, strengthening Redfin's balance sheet and enabling a 38% increase in advertising spending for 2025, which should enhance revenue and market reach.
  
• Redfin aims to improve real estate gross margins to around 30% in 2025 by eliminating certain agent entitlements and expecting higher efficiency from new hires as they start closing sales, impacting net margins favorably.
  
• Enhanced monetization strategies, like increasing mortgage and title service attach rates and improving digital advertising, are expected to boost profits across business segments beyond traditional brokerage, positively affecting earnings.
  
• Significant cost reductions, including restructuring and layoffs as part of the Zillow partnership, are expected to significantly increase adjusted EBITDA in the rentals segment and contribute to company-wide profitability improvements.

Redfin Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Redfin's revenue will grow by 5.5% annually over the next 3 years.
• Analysts are not forecasting that Redfin will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Redfin's profit margin will increase from -15.9% to the average US Real Estate industry of 5.2% in 3 years.
• If Redfin's profit margin were to converge on the industry average, you could expect earnings to reach $63.8 million (and earnings per share of $0.43) by about April 2028, up from $-165.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.5x on those 2028 earnings, up from -7.3x today. This future PE is greater than the current PE for the US Real Estate industry at 21.3x.
• Analysts expect the number of shares outstanding to grow by 5.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.98%, as per the Simply Wall St company report.

Redfin Future Earnings Per Share Growth

Risks

• Redfin's transition to the Next pay plan led to unexpected higher onetime transition costs, impacting net margins as agents who preferred salaries left, causing a temporary loss of sales.
  
• The company anticipates lower first-quarter profits year-over-year, with a forecasted adjusted EBITDA loss of $32-$39 million, suggesting margin compression and financial volatility in the short term.
  
• While Redfin aims to increase advertising spending by 38% to drive revenue growth, this high expenditure may pressure net margins if expected revenue growth does not materialize.
  
• The anticipated slow recovery of U.S. home sales and relatively high interest rates may constrain revenue growth and limit the effectiveness of the increased sales force.
  
• Dependency on the Zillow partnership to enhance rental listings could pose a revenue risk if the partnership fails to deliver the expected increases in audience and monetization, thereby affecting Redfin's top-line growth.

Valuation

• The analysts have a consensus price target of $10.13 for Redfin based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.5, and the most bearish reporting a price target of just $7.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $63.8 million, and it would be trading on a PE ratio of 31.5x, assuming you use a discount rate of 10.0%.
• Given the current share price of $9.57, the analyst price target of $10.13 is 5.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.