Redfin vs. Compass: Which Stocks Are Real Estate Technologists Better?



Real estate technology attracted a lot of attention against the backdrop of a booming housing market. Zillow Group (NASDAQ: Z)(NASDAQ: ZG) remains here as a pioneer and industry leader, and although he has been struggling lately Opendoor Technologies (NASDAQ: OPEN) makes the instant cash offer model a viable solution for homeowners.

Then there is Redfin (NASDAQ: RDFN), which itself is a broker using technology to streamline the home buying and selling process. Although he has received a lot of praise from investors, he is not alone in the brokerage department with technological advancements. Compass (NYSE: COMP), part SoftBank Groupfrom (OTC: SFTBF) Vision Fund’s technology investment portfolio went public in March and raised about $ 450 million in new cash from its IPO. Which is better – Redfin or Compass right now?

Two people enter the house, carry boxes to the kitchen.

Image source: Getty Images.

Redfin: the real destroyer of the status quo

Redfin is a small but fast growing broker that uses technology to keep costs down. Its original claim to fame: lower commissions than traditional brokerage firms. His agent commission is only 1% for those who use Redfin to both buy and sell a home, far less than the 2.5-3% charged by most of his colleagues.

The company can provide such significant savings by streamlining the transaction process through software – from automated workflows to a leading website where potential buyers can view and virtually inspect properties for sale. It expanded on this base offering with its own in-house mortgage and title services, direct cash offers (called RedfinNow, which compete with Opendoor), and RentPath’s recent purchase to include apartments and rental properties directly from

It is a tiny firm with a market share of only 1.14% of the total value of US homes sold in the first quarter of 2021. But Redfin’s business is growing rapidly. Its share of the residential real estate market last year was less than 1%, and its revenue in the first quarter of 2021 grew 40% year-on-year to $ 268 million. Profitability remains highly variable as the company focuses on expanding (free cash flow was negative at $ 56.1 million in the first few months of the year compared to positive free cash flow of $ 46.6 million during 2020).

However, Redfin is well funded to continue its ambitious growth plans. It ended in March 2021 with $ 1.39 billion in cash and investment (and another $ 102 million in limited cash) offset by $ 1.16 billion in debt. The stock is trading just 6.8x from 12-month sales, a significant discount from Zillow’s 8.4, although Zillow is already making a steady profit. If Redfin can maintain its momentum and grow market share through its traditional brokerage competition, these stocks could have real long-term value right now.

Compass: a technical platform for a more traditional model of real estate brokerage

Like Redfin, Compass positions itself as a real estate broker that optimizes the home buying process with technology. Its software suite is designed to help improve the performance of its agents and affiliates, and touts AI and data analytics as integral parts of its software platform. He was doing something right. Although Compass was founded less than a decade ago, by the end of 2020 it had about 19,000 agents and generated $ 3.7 billion in revenue.

Over the years, Compass has tried to destroy the high commission structure in real estate transactions, but has failed to do so. At this stage, the company uses a more traditional transactional approach, and agents earn more typical commissions ranging from 2.5% to 3% from customers buying and selling homes. However, its digital-driven operating model attracts both agents and potential homeowners. The total number of deals increased 67% year-over-year in the first quarter to 40,268, making the company one of the largest independent brokerage firms.

As a result, Compass reported 80% year-over-year revenue growth to $ 1.1 billion in the first quarter. However, despite its size, Compass spends significant amounts of money. Free cash flow was negative USD 57.3 million (in the first quarter of 2020 it was negative USD 177 million). Management awaits adjustment EBITDA losses will amount to $ 245 million over 2021. This is ultimately due to the high commissions paid to agents, most of whom are independent contractors using Compass software. Fees and related expenses accounted for nearly 85% of revenue in the first quarter.

But the compass is in decent shape. At the end of March, he had $ 330 million in cash and cash equivalents, and had a debt of only $ 10 million (excluding cash proceeds from the IPO, which occurred on the last day of March). Compass trades at a meager 1.4x 12-month profit, reflecting the company’s small gross margin after commissions, but a cheap price if the company can continue to grow and start generating positive earnings.

Which is better to buy?

It’s worth noting that both companies could get through hard times if the housing market cools down. Homes for sale are in short supply this year, and those that are up for sale right now are driving up the value of properties on the market. However, the long-term thesis of Redfin and Compass is to increase the share of the huge US real estate market.

There are some similarities between Redfin and Compass, but the latter is a much more traditional real estate firm, with agents charging high commissions. Redfin has a more advanced set of services and technology platform that support a truly revolutionary low commission strategy. Redfin also delivers higher gross margins and thus has demonstrated its ability to generate profits in the past. Compass not yet

The compass might be too cheap at these levels, but Redfin is getting my nod as the best long term buy right now – even if the US housing market working too hot At the moment.

This article represents the opinion of an author who may disagree with the “official” recommendation position of Motley Fool’s premium consulting service. We are colorful! Bidding on an investment thesis – even our own – helps us all to be critical about investing and make decisions that help us become smarter, happier, and richer.


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