STOCK | 8/22/20 FIRST FOCUS

REDFIN CORP GREEN YELLOW RED (Ticker: RDFN) LIGHT LIGHT LIGHT LBIR Recommendation

Stock Price: $47.44 (8/21/20) Company Size: $4.5 billion Author: Garvit Bhandari

Company Rank: 668 Sector: Real Estate Industry: Internet

Redfin Corp is a technology-powered real estate brokerage company. The company leverages technology to make the entire life cycle of buying or selling a home more convenient.

IN THIS FIRST FOCUS WE’LL COVER:

 Summary of the Business Redfin Corp is an online real estate brokerage company. Grab-and-Go

 Recent Developments THESIS The company announced solid Q220 results An investment in Redfin is a play given the current environment. Revenue on the US residential real estate increased 8% YOY to $214 million. Housing market. RDFN estimates that nearly market has displayed unexpected strength, $82 billion were paid in real estate but uncertainty persists. commissions in 2019. It is rapidly  Competitive Environment gaining market share, driven by its The market is highly competitive and low fees and convenient online fragmented. RDFN has an edge given its model. The housing market has been lower fee structure versus competition. strong till now but we remain  Conclusions/Recommendations cognizant of the fact that second The long-term opportunity remains intact surge of COVID-19 cases and but valuation is concerning, particularly double-digit unemployment could cause challenges. given uncertainties around second order of COVID impacts and depressed inventory

levels.

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0.94 STOCK: RDFN | 8/22/20 FIRST FOCUS

Data as of 8/21/20 unless specified

Revenue Fwd $1.3B Enterprise Value: $4.5B Market Cap: $4.7B (TTM): ($0.9B) Fwd (TTM) 5.1x YTD Return: 124.4% RSI: 67.8 Price/Sales: (5.3x) Gross Margin Revenue Growth 17.3% 53.2% ROIC (TTM): (21.7)% (TTM): (TTM, YoY): 200-day Moving 52-Week High: 48.00 52-Week Low 9.63 29.3 Avg.

EBITDA ($46)M CFO $45M FCF $33M

Insider Transactions (2020): ~598k shares sold by Insiders YTD; No shares bought

Key services include:  SUMMARY OF BUSINESS Brokerage: includes offer and listing services. Redfin Corp is a technology-powered real estate brokerage company. The company leverages Redfin Mortgage: underwrites mortgage loans. technology to make the entire life cycle of buying Currently available in 54 markets. or selling a home more efficient and less Title Forward: provides title and settlement expensive. As add-on to its brokerage services, it services. It is available in 28 markets. also offers title and settlement services, mortgage RedfinNow: buy homes directly from origination services and also engages in buying homeowners and resell them to homebuyers. It homes directly from homeowners who want an has been officially launched in 13 markets. The immediate sale. RDFN operates in 90 markets (in business is currently loss making and RDFN US and Canada) and offer local agents to simplify expects to generate gross profits from the buy/sell experience for consumers. business in 2021 or 2022. The main advantage of Redfin is its lower The company’s long-term goal is to combine brokerage commissions which helps customers brokerage, mortgage, title services, and instant save money. It charges most home sellers a offers to directly purchase a consumer's home commission of 1% to 1.5%, compared to the 2.5% into one solution. to 3% typically charged by traditional brokerages. Long-Term Goal: One Complete Solution Redfin helped customers buy or sell more than 235,000 homes worth over $119 billion in 2019. Customers saved approximately $1,850 on average per transaction, in 2019, compared to what they would have spent through a traditional real estate agent. It drew more than 33 million monthly average visitors to its website and mobile application in 2019. Source: Company Presentation

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0.94 STOCK: RDFN | 8/22/20 FIRST FOCUS

Key Advantages of Redfin Platform Redfin sells faster & for higher price: ~76.6% of Redfin listings sold within 90 days versus the industry average of ~75.1%. And Redfin-listed homes sold for nearly $1,900 more on average vesus competing brokerages’ listings in 2019.

Source: Company Presentation

LB•LOGIC We like companies with high growth and high margins. While RDFN certainly fits the high growth criteria, the profitability is a concern. Source: Company Presentation The TTM gross margins were just 17.3% and have been trending downwards for Higher repeat rate: Redfin’s customer repeat rate is the past few years. 59% higher than competing brokerages which validates its high customer focus. Redfin has doubled its market share over the last four years (~0.43% in 2015 to 0.93% in 2019). This Total Addressable Market (TAM) has resulted in revenues growing at a CAGR of  Redfin participates in a large addressable market ~43% during the same period. The area of concern of buying, selling and financing homes in the US. is the profitability. RDFN has never delivered According to the 2019 US Census Bureau and annual net profit and gross margins have been National Association of REALTORS, annual trending downwards as well (FY17 – 30.2%; FY18 home sales in the US were worth $1.9 trillion in – 24.5%; FY19 – 18.5% and TTM – 17.3%). 2019. RDFN estimates that nearly $82 billion were paid in real estate commissions in 2019. According to a 2019 Macquarie Research report, US mortgage origination represents a $44 billion annual opportunity while title and escrow

Source: Company Presentation

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0.94 STOCK: RDFN | 8/22/20 FIRST FOCUS

represents another $35 billion annual opportunity Real Estate Services: which comprises the according to IBISWorld in 2019. brokerage and partner business was down 12% YOY. Brokerage revenue, or revenue from home sales closed by its own agents, was down 12%, LB•LOGIC We like companies with while revenue from our partners was down 13%. large addressable market and low Real estate services gross margin was 34.2%, up penetration. This ensures long runway of growth. 200 basis points year-over-year, primarily driven by lower expenses. Properties segment: which consists of homes sold through RedfinNow program, generated $72 million in revenue, up 81% YOY. Properties gross Special/Unique Characteristics of  margin was negative 1.6%, up 90 bps YOY, the Company primarily driven decrease in personnel costs and transaction bonuses. Redfin delivers better customer experience at lower cost compared to its competitors. This is Other segment: which includes mortgage, title validated by its high retention rate, higher repeat and other services, contributed revenue of $7 business and higher net promoter score. RDFN is million, an increase of 37% YOY. Other segment the #1 brokerage website with 4x more traffic had a gross margin of 13.2%, an increase of 1,100 compared to its nearest competitor. The other bps YOY. unique characteristic of the company is its The company noted that it saw rapid superior technology which ensures that >90% of improvement in the business in the month of June listings appear on its platform within 5 minutes and the trend has continued in July as well. of their debut on multiple listing services (MLS). Accelerating Traffic: Average monthly unique Redfin has more salaried agents rather than third visitors increased 16% in Q220, with June's party agents. Redfin, therefore, takes just 1% visitors up 31% and July's visitors set to grow at a commission rather than the average of roughly 2- similar pace. June's rate is well above the 26% 3% by taken by competitors. While this allows increase in average monthly unique visitors that Redfin to gain market share, the higher fixed cost occurred between 2018 and 2019. In May and in the short-term could hurt bottom line. But over June 2020, Redfin attracted more visitors than the long-term, as the company gains market share Trulia, with only zillow.com and realtor.com this structure could be highly profitable. ahead.  RECENT DEVELOPMENTS Housing market is strong for now; COVID-19 The company announced solid Q220 results uncertainty to persist going forward: In the US, given the current environment. Revenue the housing market remains strong despite the increased 8% YOY to $214 million, while net loss pandemic. Consumer demand appears strong, narrowed to $6.6 million (versus $12.6 million in driven by increased interest in moving away from Q219). RDFN’s market share decreased by 1 basis urban centers and continued declines in long- point to 0.93% versus Q219. term interest rates. The US Census released a report showing that homeownership rates increased from 64% a year ago to 68% in Q220.

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0.94 STOCK: RDFN | 8/22/20 FIRST FOCUS

Redfin noted that more workers each month are transaction-focused real estate, mortgage and title getting permission from their employers to move & settlement services businesses. far from the office. As a result, buyers are Glenn Kelman has been the company’s CEO since flooding into markets like Phoenix, Sacramento, September 2005. He has extensive experience in Fresno, Bridgeport, Vegas and Detroit. In markets engineering, marketing, product management like Tucson, buyers are willing to pay $600,000 for and business development. Prior to joining a home in a market where the average is closer to Redfin, he was a co-founder of Plumtree $250,000. In markets like Palm Strings, buyers are Software. willing to pay $1 million where the average is less than $500,000. Chris Nelsen has been the CFO of Redfin since June 2013. He has significant financial and Redfin specifically noted that it is scrambling to operational experience at running internet-based hire to keep up with the surge in demand but businesses. Prior to RDFN, he was CFO of remains cognizant of the fact that second surge of Zappos.com. Prior to that, he led retail business COVID-19 cases and double-digit segment at Amazon. He has also worked at unemployment could cause the economy to business consulting firms Bain & Co. and capitulate again. Accenture. Lower home inventory a challenge: The number of homes on the market over the four weeks  COMPETITIVE ENVIRONMENT (ended July 31) decreased 29% year-over-year, The residential real estate brokerage landscape is with the drops only accelerating since April. The highly fragmented and competitive. According to number of homes for sale in the US is at its lowest the 2019 US Census Bureau and National level since the National Association of Realtors Association of REALTORS, there are over 86,000 and the government began tracking this data in real estate brokerages in the US. Competition is 1999. particularly intense in some of the densely Outlook: For Q320, revenue is expected to be populated metropolitan markets, as they are between $214 million and $225 million, dominated by traditional real estate brokerages. representing a year-over-year decrease between Some of its primary competitors include Zillow, 10% and 6%. Net income is expected to be Re/Max, Purplebricks, Opendoor, Compass, eXp, between $18 million and $23 million. RDFN Realogy. Of these, we view Zillow Group as its expects Real Estate Services gross margin to nearest pure-play competitor. increase year-over-year for Q3. This would represent fifth consecutive quarter of improving real estate services gross margin. LB•LOGIC We think highly competitive market such as RDFN’s tend to put pressure on profitability. RDFN has been competing on low  COMPANY MANAGEMENT commissions and has never been profitable. Redfin is run by highly experienced management team who has successfully built it into one of the category leaders. In the past few years, it has added executive talent with deep experience in

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0.94 STOCK: RDFN | 8/22/20 FIRST FOCUS

 TREND ANALYSIS: The long-term opportunity and the fundamentals VALUATION are intact but the valuation is concerning. RDFN currently trades at 5.1x TTM sales, which is above the market leader Zillow (4.9x). While the revenue growth has been strong, RDFN continues to lag on profitability. Its gross margins LB•LOGIC While we think the (~17%) are significantly below other peers and market share gains will continue, but also below the usual left brain selection criteria. we do believe that a lot of the market We think the risk/reward at current valuation is share gains is baked in the forward estimates and the stock price. less favorable especially after the stock has rallied ~300% from March lows. There is little room for multiple expansion or upward estimate revisions.

convenient online model. The long-term  CONCLUSION / opportunity remains intact but valuation have RECOMMENDATION risen to an extent where we see risk-reward Redfin's share of the large US home-sale market balanced, particularly given uncertainties around still stands at less than 1%, leaving plenty of second order of COVID impacts and depressed growth opportunity. And it's rapidly gaining inventory levels. We assign a “YELLOW LIGHT” market share, thanks to its low fees and rating to RDFN.

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0.94 STOCK: RDFN | 8/22/20 FIRST FOCUS

 Stock Chart for Redfin Corp (RDFN)

 Performance Data 2014 2015 2016 2017 2018 2019 RETURN ON INVESTED CAPITAL (%) NA -84.7% -48.4% -25.1% -52.2% -41.6% GROSS MARGIN (%) NA 26.0% 30.9% 30.2% 24.5% 18.4% NET INCOME (MILLIONS USD) NA -30.2 -22.5 -15.0 -42.0 -80.8 YoY Growth (%) NM NM -25% -33% 180% 92% REVENUE (MILLIONS USD) NA 187.3 267.1 370.0 486.9 779.7 YoY Revenue Growth (%) NM NM 43% 39% 32% 60%  Valuation Data 2014 2015 2016 2017 2018 2019 SHARE PRICE (USD) NA NA NA 31.32 14.40 21.14 SHARES OUTSTANDING (MILLIONS) NA NA NA 81.8 85.7 91.6 MARKET CAP (MILLIONS USD) NA NA NA 2,561 1,233 1,936 PRICE/SALES RATIO NA NA NA 6.9 2.5 2.5

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0.94 STOCK: RDFN | 8/22/20 FIRST FOCUS

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0.94 STOCK: RDFN | 8/22/20 FIRST FOCUS

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