Editor's Note: The post below was originally published on 9/1/17. If you're interested in accessing our institutional research email firstname.lastname@example.org.
Much has been made of the tech disruption barreling towards the real estate brokerage industry. The Wall Street golden child of this play is recently IPO’d Redfin (RFDN).
We think investors have gotten ahead of themselves.
“It’s not that we don’t like the company,” says Hedgeye Financials analyst Josh Steiner in a recent institutional conference call. “Actually, I do think it’s a pretty good company, decently run, innovative and creative. It’s just that their current valuation has priced in an incredible assumption around its future growth and what it’s going to look like relative to what I think is possible.”
So, if RDFN shares have you all hot and bothered, here’s a healthy dose of perspective. Consider other real estate heavyweights, like Realogy (RLGY) and Re/Max (RMAX) compared to still green disruptor Redfin.
- Realogy: 15% market share; $4.7 billion market value; low teens EBITDA margins
- Re/Max: 11% market share; $1.1 billion market value; 50% EBITDA margins
- Redfin: 0.37% market share; $2.1 billion market value; negative EBITDA margins
Something isn’t adding up.
While Redfin is growing fast, consider this: In the 1970s, Re/Max was considered the young disruptor. But it took the company 40 years to capture its current 11% market share. Perhaps that isn’t the best comparison. Re/Max has a franchise model for its brokerage business. Steiner thinks Redfin will likely evolve to look more Realogy, a hybrid of owned brokerages and franchises.
On that score, Steiner did a simple thought experiment.
“If you were to apply Realogy’s ratio of market cap to market share to Redfin, basically you would end up with 1/30th of Realogy’s valuation, which is something on the order of half a billion dollars as compared with Redfin’s current valuation of 2 billion,” he says.
Look out below.