Chit Chat Stocks - Redfin (RDFN) | Deep Dive

Episode Date: March 18, 2021

Redfin is a technology-powered real estate brokerage. Redfin was started as the first map-based search. Redfin wants to bring as much value to the home buying or selling process that it can. Brett, Ryan, and Ian dive into the business fundamentals as well as discuss their thoughts on the business. As always, enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (2:17) 1:40 Industry | (9:33) 8:56 Management & Ownership | (12:35) 11:58 Valuation | (17:31) 16:54 Earnings | (20:11) 19:34 Balance Sheet | (22:03) 21:26 Our Analysis | (25:07) 24:30 Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Thursday Deep Dive episode on Chitchat Money. We're here with Ian Gray as always. Ian, how's it going? I know you've been buying a little bit of Mohawk recently,

one of our old episodes. So, how's it doing? You know, a little action today, huh? yeah a little bit of action it's uh it's taken a hit recently and some people are you know some people think it's due to some warrants and other people you know no one's exactly sure why it's down but uh looking to scoop up a little bit at a little bit of a discount so all right there you go don't let's yeah don't listen to the noise ever i will say i uh did a little bit of digging on mohawk recently and i got a little more bearish than i used to be so we can talk about that off the show we can do yeah we may have to do a follow-up with them in maybe a year or something. That could be a fun look back. But we're going to be talking Redfin

today. This is Ryan's pick. But before we get to that, we got to talk about 7investing. You guys know the pitch. If you've listened to the show before, we say it every time, but they're basically the best deal out there. If you want research as a retail investor, it's only 17 bucks a month, usually. But with our promo code CCM, you get $10 off at checkout. The returns since starting in March of last year have been 48% versus the average return of the S&P of 21%. So they're beating the market in the last year by almost 27%. That's phenomenal returns. That's 150% outperformance. Yes. In Chabot terms, we are cruising right now, but they have a long-term mindset as well.

Very similar to what we have here. It's, I don't know, it's just a great service, but let's kick it off. Ryan, you want to talk about Redfin? Sure. So at a high level, Redfin is a residential real estate brokerage. So if you're not familiar at all, I think real estate broker, I'm sure a lot of people, a lot of people listening right now have probably heard of them before, but yeah, they're also the most visited real estate brokerage site globally. And if you're thinking, well, don't they compete with Zillow? Zillow is not considered a real estate broker. They may have a component of it now, but that's not what their business model was intentionally or originally. Anyway, so I have a quote from the

10K because I don't feel like paraphrasing and just basically changing the words. So it says, our long-term goal is to combine brokerage, mortgage, title services, and instant offers to directly purchase a consumer's home into one solution, sharing information, coordinating deadlines and streamlining processes so that a consumer's move is easier and often less costly. As we integrate these services more closely over time, we believe we can help consumers move much more efficiently than a combination of standalone brokerages, mortgage lenders, and title companies ever could. So Redfin has helped customers buy or sell more than 310,000 homes in 2020. They also charge much lower commissions to sellers, and they also have a refund part for

the buyer but the the big structural change is that their employees are full-time employees and there is they do you say you're their agents you said employees are employees they're they're agents their real estate agents are full-time employees whereas out of traditional brokerage you've kind of paid on commission so the agents do get i believe they do get a smaller portion of that commission or whatever but the they're really paid they get bonuses based on volume So the amount of houses they sell, instead of just trying to get the best or the biggest deal, they're trying to get as many deals done as possible. So if you think about that, that is really friendly to the customer on both sides because they're just trying to get the deal done. They're trying to find a mutually agreed upon price and not gouge one side or the other.

So that's sort of the shift that they've taken in the industry and they've kind of been the first mover on that and their commissions are pretty low. Um, am I missing anything else or is that kind of cover it? Well, I mean, now they do some eye buying as well, which will get into some future growth opportunities, but Ian, you have anything else? Yeah, I was just going to make one more comment on the agent. So one thing they, they mentioned about the agents is they have a really high retention rate on these agents because they get health insurance. They're paid a regular salary. People aren't jumping from brokerage to brokerage. They come to Redfin and a lot of them stay at Redfin. And then the other little piece is you'll see when Redfin's describing its revenue is that it's talking about the agents,

its own agents, and then also its partner agents, which are agents that, like when someone clicks on a listing on Redfin, if they don't have their own agent, they may refer them to another agent who then pays them a referral fee for that thing. So they also have this network of agents that are with other brokerages, but are paying referral fees to Redfin. Right. And they said they wanted to slowly get it all to Redfin agents over time. But right now, they want to fill all the supply without ruining all the customer's experience. Yeah. And that is, correct me if I'm wrong, Ian, but that is basically Redfin, I assume, leveraging their website and their reach since it's the most clicked on, most looked at real estate website or brokerage.

And again, Zillow is the most visited one, but they have the technicality where it's like people that do brokerage or sorry mortgages mortgages yeah and it is when did zillow do you guys know when they introduced brokerage services because that's just recent yeah the last few years the difference between zillow and redfin is that a lot most of i believe almost all of zillow's revenue comes from ads or promotion yeah at least gross profit because i know they have i buying which might have you know super high revenue but low margins right and they've had um like referral fees to these other listing agents kind of like redfin does but for a long time zillow really said we're not going to get into having actual agents that are our own just

recently i think it was in um i was just looking at this and i think it was in october maybe of 2020 they started hiring a few of their own agents and so for a long time they've stayed out of that but they're just now starting to get into it which shows that maybe um you know redfin is onto a good model here and like because like you said that they are leveraging their website to you know get those referral fees redfin is um but as brett was talking about the uh that's more valuable when they actually have their own agents that they can refer right that of these outside agents and so um it becomes like i think redfin's transitioning more and more to that model and i assume that zillow's looking at that and going okay we can pick up some points

of margin here it's going to be a little more efficient we get higher revenue numbers all that type of stuff yeah it seems like they're slowly merging into like all the they're slowly just competing with everything each other's doing. And then you got open door on top kind of going scorched earth. We're going to do whatever we want and just buy up as much as possible. But Ryan, sorry. Yeah. History about the business. They were founded in 2004 by David Eriker, Michael Dougherty. I might be terrible with names. You guys know that. So, and then David Selinger in Seattle, Washington. So right next to home for us, but David Selinger actually dropped out of university of washington medical school which uh that is a rival college to brett yes um but anyway

so boo huskies but uh he was actually he dropped out of the medical school in pursuit of a career in software design and they originally launched in just seattle in the bay area i think in 2006 interesting note uh sellinger was actually neighbors with sammy inkinen and they had he had like a capitol hill apartment that's basically where they all worked out of Fun fact, that's where the autonomous zone was. I don't think that's a thing anymore, but that's where it was this summer. Right. Maybe we're just talking about too much Seattle stuff.

But Sammy Inkonen actually founded Trulia, and he was his apartment neighbor. So two giant real estate moguls, I guess you will, in the same apartment block there. And then early on, Redfin received $1 million in funding from Madrona Venture Group and $8 million from Vulcan. and Vulcan was Paul Allen's investment firm and Paul Allen is from Seattle for anyone who isn't familiar um and then 13 years after their founding they IPO'd in 2017 they've had a pretty successful business ever since it was really stocks stocks doing well yeah they were one of the pioneers of map-based searching um especially I think they were the pioneer for real estate map-based searching so uh then kind of Google and some other ones fell in line after that but yeah that's what

that's what they claim but zillow kind of took over that market a bit but you know it's not like redfin has no i don't know it always feels to me like zillow's the leader but maybe that's just my personal experience for the consumer like just consumers looking at consumer i would say they are yeah but uh in you want to earn industry and landscape yeah so you know from their internal estimates redfin thinks they have about one percent i think it's actually 1.00 percent of the u.s market in 2020 uh so not anywhere close to market saturation i mean as we all know residential real estate is huge. So very fragmented, very fragmented. Yeah. And there's a few competitors, which I'll get into, but the overall industry, there's estimated a 5.64 million

homes sold in 2020, which is up 5.6%. Average home worth was $266,000 of 8%. As people have probably seen either from the data or anecdotes, the real estate market is really hot, quote, hot right now, which always makes me laugh, but there's probably a lot of demand out there for Redfin. No need to go into really any of the specific numbers, but again, like, you know, with the COVID dynamics, you know, larger amounts of, well, the age groups that are becoming home buyers, kind of those millennials, they have, there's a lot of people of that age in the United States compared to the average age groups. So that's going to just create a lot of demand right now and should over the next few years. Traditional competitors would be someone like Keller Williams,

Coldwell Banker, Windermere, but there's a ton. And there's not, correct me if I'm wrong, but there's no huge leader. It's very fragmented. And then the high buying competitors would be Opendoor, Zillow. There was rumors that Amazon was going to do this, but that just seemed like one of those rumors that Amazon is, it seems like there's a rumor that Amazon's competing with everyone and they really don't follow through with it like maybe 10, 20% of the time. And then Regineo is kind of sort of leaning into both camps. They use the traditional agents with twist, but they're also embracing iBuying. They have that model where they're saying, all right, we're going to align the incentives of the customers, agents, and us, or us and the shareholders.

Anything else to add there? I would just say that there's also a lot of local agents and stuff like that where they, as a collection, probably take up a lot of market share, but there's not any single one that obviously takes up a lot. I don't know of any single real estate broker that has massive market share. Yeah. I was trying to look. I couldn't find any, but that might just be like behind some paywalls or something like that for industry data. And I do feel like you said Amazon rumored that they might get into it. I feel like sometimes they just toss out rumors just to see people's stock tank. Yeah.

Just for fun. Yeah. I mean, they had the patent for the blimps. Remember that? The blimps that were going to drop packages. I mean, that was just, they just made a patent. Ooh, okay. But the, sorry, Ian, do you have anything else on that? And then you want to hit management. ownership well yeah i was just gonna ask you think they have like an office pool going like how how far down will uh open door go if we announce we maybe get into i buying or whatever i mean they uh yeah with like when they announced the whole food acquisitions they must have been like wow we can really just say something and then everyone's stock tanks 20 kind of cool yeah

but yeah i'll dive into management so the ceo is glenn kelman he joined the company very early on in 2005 as the CEO. Before that, he co-founded a software startup that was eventually acquired. One interesting thing that I do like to see is that he played many roles at that company. He was like heading up the technical team, product development, marketing, and business development at different times. And so it's kind of, you know, when you're in a startup like that, I think everyone's wearing a lot of hats and he really exemplified that. And so someone I look at and go, okay, this guy probably understands the complete business fairly well. And a lot of the a lot of the way that the teams work together and how things need to be done and just knows

how to talk to everybody and those different types of roles, I would assume. Before that, he was a product manager at another startup that was also acquired. So definitely a guy that's been pretty involved in startups. I think right when he got out of college, he was like trying to be a novelist. And he said that that really didn't go too well. I think it's been a year and two years and his girlfriend wasn't too happy with them and his novel wasn't very good. So he decided to join the startup world. But anyways, there's one line on his LinkedIn profile for the Redfin section. And I just thought it was a pretty good line. He says, Redfin is a technology powered real estate brokerage. We help people buy and sell homes. And just kind of encapsulating, I like to see what

management teams see their own role as. And just to really simplify it there that we help people buy and sell homes, which is different than some of these competitors, someone like Zillow or someone like Opendoor even that would probably like this really seems like a broker's firm's mission. So he owns about one and a half percent of the shares outstanding. So not a huge chunk, but still pretty substantial. And he's also known a little bit as a CEO who is outspoken about supporting diversity, business needing to do something for good, trying to be kind of a moral ceo um he's also kind of uh optimistic i would say he's like very like he was on i watched an interview with of him on cnbc and he was like uh at the end of it he was all like smiling and

saying man it was such a blast to be here today and just love being on and thanks for all the great questions and you must have a good therapist yeah i'm looking at it and going uh you know like i would i would be ecstatic to get on cnbc someday but i don't know if i'd be as uh as the ceo of redfin i don't know if i'd be that excited about it but anyways the last thing i'll say is they have gotten um they have quite a bit of uh performance-based compensation and as i was looking through the proxy statement that all looked um fairly good they haven't released the most recent proxy statement um for 2020 but um the 2019 one looked good they didn't seem like the the bonuses were extravagant or anything like that. But they've noted an update for the bonus

program that got a little bit of backlash for this coming year. And they said that we're tying 25% of 2021 executive bonuses to increasing the representation of people of color at Redfin, especially in management roles. And I don't have a strong opinion on whether this is a good or a bad thing. Some people thought that's kind of patronizing a little bit, or you're going to hire people of color and all these white executives are going to get the bonus for it um he looked at it and said hey we're we're trying to do something good and we're not going to get this bonus that we would have gotten otherwise unless we do this so you know you can kind of like i said i don't have a strong opinion on that you can kind of take that as you see fit but um one thing that has been in

the news a little bit recently it seemed like uh from when i was reading the transcripts he's not a he's not just following the robotic ceo speak uh which i liked uh seemed very authentic um i don't know i don't know what do you think ryan about him i find it interesting that he came on so early yeah actually the founder is suing them oh really i was i was debating whether to mention that or not because it doesn't seem to have really a material effect on the business at least in my opinion but um it is a little bit of an interesting note that they are suing him for some pattern infringement, basically. Yeah, something like that. They also, I know that early on, I guess this has kind of been just tangent, but early on,

they had to lobby in Congress to be able to provide that sort of transparent information on homes to everyone around in the markets they served. And so, I mean, yeah, there's been some sort of resistance in this business model. And I think it's probably almost essential that they that funding early on in order to do it yeah probably right and the yeah i mean it seems like the real estate lobby probably wasn't happy yeah yeah the agents they're kind of disrupting them but evaluation evaluation market right now is about 7.85 billion dollar ticker rdfn i was using 103 million shares outstanding which is from the 10k that's the latest number so not the end of 2020 but sometime in february price to sales was about 8.86 price to gross profit 33.8 so quite

Rich price to operating cashflow, 129, very rich there as well. Make sure you're watching gross profit, not revenue. I believe we talked about this a few months ago when we covered open door, but if iBuying becomes a larger percent of sales and gross margin falls, you got to watch the gross profit number. And in reality, you should watch the earnings and free cashflow number. But if they're not that profitable, gross profit's a lot better than revenue. Share count has gone from about 81 million to 103 million in the last few years. We're going to have some headwinds from share counts. And they have about 10.16 million stock options and RSU is exercisable. Interesting note, because I do get bitter about stock compensation as a

shareholder. They only have 4,200 employees. So that is about 2,500 shares per employee that are exercisable right now. And at the current price, that's $185,000 worth of shares per employee. It doesn't seem crazy, but again, that's just kind of putting some numbers on what kind of dilution you might face as a shareholder. Not necessarily a bad thing because you do have to incentivize the employees, but it is part of the investment Redfin is making to grow their business. Also worth noting that there are 40, whatever, 4,200 employees, but those stock options likely are not equally dispersed. yes it's just it's it's an average not a median uh ceo probably getting more uh and what's weird

is they also have a discounted share purchase plan so you can buy them at 85 of the current price i love when companies do this but i always get confused why i need both uh i know this is a topic for like another day but it seems like if you're gonna allow people to buy it at a discount price why not give them a lot of cash and let them buy it maybe it's better to have both but who knows just know that uh you know shareholder delusion is going to be something you have to factor in yeah evaluation and to touch on the sort of valuation metrics uh there isn't they kind of have the conundrum it's similar to the cash app where they have to record the volume as revenue um and so it makes gross margin look really really low and it can hamper gross margin

on the overall business whereas most of the real gross profit is still coming from the services so the commissions uh for buying and selling homes yeah uh but i'll get it right into earnings then uh in 2020 they had 886 million in revenue that was up 13.6 percent year over year they have 20 26 gross margins versus 18 and a half percent a year ago their operating income was basically breakeven. I think it was literally under a million dollars. So it was like less than 1%. But the real estate services segment had 56% gross margins. And so that's where that portion of the business is still relatively high margin. It's not anything. It's probably not what you see with some of the SaaS businesses, but the property's revenue is obviously much lower.

and they generated 61 million in operating cash flow for the year versus negative operating cash flow the year before uh share count rose by seven and a half percent over the last year but i might have got that number wrong because i took uh i think i took the wrong share count because yours was a little higher than mine yeah i was using you might have used weighted average but it's just slightly different okay just yeah factor that in as well and then they had 42 million monthly average visitors to the Redfin website and mobile app, that actually grew 28% year over year. And then the Redfin market share was, as Brett mentioned earlier, 1% of the overall home value that I think was bought or sold. And that's actually up from 0.81% in 2018. I kind of like

that they offer that as a metric. And it's not just because so many times you hear, well, think about how big the market is. If they can just capture 1%, but they did just capture 1% and it's a significant portion of revenue. I expect that they had a huge party when that happened. That would have been such a milestone.

Like 15 years in the making, you know. Think if they get 10%, that'd be amazing. But all right, balance sheet and liquidity. Ian, you want to go? Yep. So they have about $925 million in cash. And that's a number from the 10K that's before this acquisition

that they just made we're going to get into in a little bit so that acquisition was about 600 million dollars in cash and so um the cash balance should be after that will be more somewhere around um 300 million a little more than that probably uh they have debt of around 600 million dollars most of that is convertible notes um a lot of them are their 2025 notes which have a conversion price of 7251 a share which is just below the current share price well do you know when they did these because that would have been that's that's yeah it's below it already because i've done yeah it was back in october and i think in october the share price was somewhere around 55 60 bucks a share something

like that so there has been some some appreciation since then but not a not a not a huge premium i don't think on the conversion price um the inventory is about a third less than it was at the end of 2019 which i i'm sure you'll remember us talking about this with open door But like Opendoor, they paused all their iBuying efforts in March and didn't start them back up again until mid-June. And so that caused two things. One is they were worried about, you know, we don't want to get all this inventory of houses on our books that we're not able to sell because it just cost them money to hold the inventory. And two, and they didn't know if it was going to be dropping. And so they stopped buying, which then caused them to not have as much inventory, which is a good thing.

But also when things started ramping back up, they haven't sold as much because they don't have as much inventory was basically the claim that they've been making, which makes sense. Um, so, you know, it, we'll see where they, how they take this moving forward, but they definitely rolled back a little bit on the eye buying piece of it this year, which as Ryan was mentioning, um, improved gross margins for the year because the gross margins on that eye buying is just abysmally low. So that's, that's the reason that, uh, gross margins increased in this past year.

Yeah. The balance sheet is really important for Redfin and all these iBuying companies because they need a lot of liquidity to make these purchases. Yeah. And one other thing to note on the balance sheet that I forgot to mention is they have something, I think they call them warehouse credit facilities. And so there's part of their debt is that type of stuff, which is basically credit they use to help with their mortgage origination business. And so it's short-term debt, but you will see, I think it's about 60 million maybe of that type of debt on their balance sheet. And so they've got a few different, they've got the convertible notes, they've got this stuff that helps with the mortgage origination. And then they've also got

like a revolver, basically a line of credit. And so there's a few different types of debt that they use for different types of scenarios. Yeah. It seems like they, though, they kind of have those bridge loans, you know, again, to just provide the liquidity, right. When they're buying stuff because those just cost a lot of money yeah ryan anyone else we go all right well that's going to do the first half we're going to hit an ad break and we're going to talk all the great stuff on the second half of the show cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can

play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply all right welcome back in first up is competitive advantages i think this will be a fun one uh for redfin because they're kind of trying to be the rule breaker if i want to do the david gardner quote uh so ian why don't you kick things off what do you think yep so the first thing that comes to mind when i think of a competitive advantage for redfin is the high retention of agents and their agent network that they have developed and just the different model they use um like we've said it's not commission-based it's they actually pay these people

as employees um and with benefits and so zillow has just started trying to hire agents to build out that network. Um, and that's kind of suspected to be in order to improve margins for Zillow's eye buying business that they can, if they can have their own agents as part of that process, rather than have other agents, it's going to improve the margins for Zillow. Um, and then, uh, I think it gives, uh, Redfin a competitive advantage because it's closer to how real estate works currently. You don't have, um, like, and this is a competitive advantage relative to Zillow in relative to open door that they have, that they, they're not asking people to buy a house entirely on their computer, right? We have an agent for you and they're making, they're building

tools that make it easier to move the, you know, move you, um, through a buying process using an agent. And one of the things that I find to kind of be interesting is they've discovered like, man, we have some really high performing agents and we're going to go put those people in the field. And we're going to refer to them more on when people click on a listing on Redfin. And so they're trying to kind of promote their high performers and get them to do more and more volume. And some of their lower performers are saying, hey, you can actually stay in the office, not go out in the field as much. And you can do stuff that is more focused on like helping people through the iBuying process or things like that that are less tactile. And so they seem to be doing a good job of building this agent network, utilizing it, and even optimizing it.

I think that is probably the biggest advantage is that they haven't gone out and done something that's too big of a step up. I think it might be a little hard for Zillow to go and become basically this – it's like people don't go there to actually buy a home. They just go there to look at fun houses that they want to have. It reminds me a bit of online grocery, if that sounds weird. It's almost like Pinterest. they're like going there for inspiration instead of like actual home purchasing and redfin is really like the it's taking that tech and making it a more logical next step for the home buyer um i agree with that but for online grocery just it's kind of something again where it's like a

solution looking for a problem like people do they really want to just do this all online i don't know. I'd rather spend a few hours and go visit it. Yeah. Um, sorry. And then my competitive advantage, I guess, was scale and notoriety. Uh, they are gaining market share. And I think a lot of that is because the more people that, uh, sell homes on the platform, the more useful the platform becomes. Um, don't say flywheel. I won't say flywheel, but it just, I think people under appreciate how difficult it can be to scale a real estate operation. And for them, they've entered so many more new markets. I mean, even look at Opendoor. They've only been able to enter so many markets at a time. Redfin already has that scale, I believe, across almost all the

states in the US. No, it's not as far as you think. They're in 95 markets, but I think they're dividing it pretty small. They're not in their map. Okay. Some of it's the states with not many people, but they're not in, they're not in every state yet. The more I know the mortgage, we'll talk about this in a little bit, or maybe that was Redfin. Maybe that was iBuying. I could be confused. I think it was, it was like 95 or 96 markets, but I don't think that was specifically for iBuying. I know the mortgage service is only in, I think, 21 states or something like that. So, but yeah, more than some of their competitors. Yeah. Brett, what about you? I do think the business model, you guys mentioned it a bit too. You know, it's,

it's like the best way against the traditional brokerages and these iBuyers. I think they have the best model for sure. Like it creates a win-win-win scenario for all parties. You know, the agents do better. Customers do better because commissions are lower just with the structure they have. And then theoretically, and so far, shareholders are doing better because their business is growing. Only concern here is I think Zillow could, you know, does have the advantage with search and explore. If they can utilize that correctly, that could be a way for them to counter position themselves versus Redfin. But Opendoor, I know a lot of people like Opendoor. And when we talked about them first, it seemed like a novel idea in the fall.

But I think it's a third wrong idea that it's just getting absurdly cheap capital at the moment. What do you guys think? Thoughts about that? Yeah. And like you said earlier, I think Opendoor is sort of going to scorch earth. I think they're really going out aggressively at a market that tends to move pretty slow. And Redfin has been a little more methodical and it's taken more time to build up this reputation. Yeah. Ian, what are your thoughts? And then you want to hit your future growth opportunity. So yeah, my opinion on Opendoor I think is it's an interesting idea and I think it has a place in this market. I think there will be some people who really enjoy the iBuying experience and are willing to take a little bit of a lower price oftentimes for the

Opendoor purchase than they would have otherwise been able to get on the open market for the speed and the efficiency of it. But I don't think it's going to take over the whole market. And so I think something like Redfin is really an attractive opportunity that, like you were saying, Brett, kind of has the best of both worlds. And Open Door has its place, but I don't think it's going to transform the entire real estate market. As far as a future growth opportunity, this is maybe a little bit of a contrarian point of view, but it kind of piggybacks on what I was just saying. I might be wrong in this front, but iBuying is super low margin, and I don't really see that those margins expanding at all. Um, I kind of would like to see Redfin focus more and

more on the agent network and build that as efficient as possible. Maybe create some more add-on services, just like, you know, mortgage origination, some other, they have that already, but like some other services like that, that, um, they can kind of add value to each real estate transaction. And so make it things like, um, open door or not a particularly attractive option because you've already made the process super smooth, super easy, but it's not just a complete iBuying process. Right. Okay. That makes sense, Ryan. I'm not sure. Yeah. It gets recorded as low margin.

And I'm not that big of a fan of iBuying because I think it's a little bit of a risky business because there's so many macro factors with real estate, But they have to buy the home and sell it, which in itself isn't super low margin. It just gets recorded as revenue. And I think they are taking the whole transaction cost as revenue and then making the profit or whatever they resell it for, that little gross margin. But anyway, I'll get to my future growth opportunity. It's the mortgage business. well first and this is small but this one looks important and it's really important uh make it so

when i'm on the redfin website and i click on a home it doesn't move me to a new tab i think that's just simple and easy and it's uh so if you're listening and you're a developer at redfin uh i think that would be a good next step but other than that um expanding the mortgage business into the remaining states i feel like that is the logical next place for consumers to go once they've sort of found a home that they want is you know how do i finance this um where do i go to get it if they can do that right there from redfin as well that's great right now they are in 56 markets which is i don't know how exactly they define a market but it's only in 21 states so i think they have room to expand on that yeah and that's obviously a growth opportunity that's

already in practice so it's nothing that innovative but uh just that that's one of the part of the business that I like the best. Yeah. All right. I'll hit mine. It's the acquisition of RentPath. They spent, I believe, $600 million getting this out of bankruptcy. Not sure if they could have gotten a lower price there, but I think whoever owned apartments.com was trying to get it too, but the FTC didn't want them to get it. So Redfin got it. They had $194 million in sales in 2020. So a bit on the cheap, depending on what margins they had. I believe they have 50 million in EBITDA. Could be fake EBITDA. Can't trust that just from the press release, but it makes sense to integrate something like this with Redfin. If you don't

know what rent path is, it's similar to apartments.com where you're trying to find rentals instead of the Zillow Redfin type where you're going for home buying. Although Zillow competes with them as well. But my first thought with this is that the finding apartments online stinks. I did this about three months ago. Ryan has just done this. Honestly, Google Maps was better. It's not even great because it's not optimized for searching for apartments, but it was so bad.

It's terrible. Apartments.com stinks. It's atrocious. It stinks. Maybe Rent Path works, but I mean- There's a lot of room for improvement here. Yeah, there's so much room for someone to win that market. So the five goals for management when I did this, I was reading the transcript from the

acquisition call. They said they want to get more listings on RentPath and integrate it into Redfin. So to combine it for renters and home buyers in Redfin, which makes sense. They're going to let property owners only pay for signed leases at least through May. So they're going to try to onboard people at least quicker and make it cheaper for people. They're going to hire agents for rentals, which seems interesting. Don't know how that's going to work. They're going to work with businesses, which means the apartment owners. And then long-term, they want to, quote, redefine renting in the consumer's favor. It'll be interesting to see what they do there. but they did it with a little bit with home buying.

So it could be interesting. And there is a lot of, you know, there's a ton of improvement to be had there. I mean, I, I had to, I went through the most terrible process.

I, it really, you just end up going to every single website and looking at their little map directory or having to call them because it's not always up to date. And then apartments, apartments.com is usually not up to date. So like you never want to rent through there or anything. that. Yeah, shortapartments.com. Don't know, it's not investment advice. But if you have anything

on that, and if not, we can go to highlights and lowlights. Yeah, let's dive into highlights and lowlights. So one thing, and we kind of mentioned this a little bit earlier with the 1% of the real estate market, but they provide a lot of business and industry metrics in their 10k, which is kind of cool to be able to track just those numbers and get a little bit of a better idea about what's really going on in the business and the numbers that they think are important, the KPIs, if you will. They show monthly visitors, revenue per transaction. We mentioned the share of the real estate market along with a few others. And that's just, I always like seeing that as an investor to get a little bit of transparency into the business. I think Ryan had mentioned this,

but the brokering business increased 50% year over year in Q4. So that piece of it was really growing a lot. And that's a revenue number. And so just again, the piece of the business that I think is most important is that the real estate broker business and that is growing at a high level in Q4. And then they're also saying they're hiring lead agents faster than ever and trying to really hone and optimize for the most effective agents. In terms of low lights, they are subject to market fluctuations as interest rates rise, people are less interested in buying homes because mortgages are more expensive. And so those macroeconomic factors do matter a lot for a business like this. And you can't just ride this one out through any,

Well, you can't ride it out, but it will be volatile in some of those more volatile macro environments in a lot of cases. Yeah, it does seem cyclical a bit, but yeah. I'm curious what happens in an 08 type of environment. I don't know if that'll ever happen again, but does that kill Redfin's business? They went through 08. They want the business they are now, but does that kill their business? I think that I'm not an expert in real estate, but yeah, they're probably fine. You know, Zillow and Redfield are probably fine in a way because they're a capital light.

But if they go all heavy into iBuying, I think there's a little bit of trouble there. What about you, Ian? Yeah. And I was just going to say on that, that the other thing about them that makes them different than the traditional brokerages is like we've talked about, they have these agents as employees. And so it's a higher fixed cost base on some of that. And so in a situation like that, I assume that they'd make the tough decisions that they had to. And it'd be interesting to look back and see what they actually did in 08 if there's any articles on it or something like that. But yeah, I think their business would definitely take a hit. And one more point I'll make on the iBuying that I had not made earlier is that, like I said, yes, they are low margin. But part of the reason that they can make that a somewhat effective business is because of the leverage, right?

They're using borrowed money at low rates in order to, you know, get better returns on equity on some of those house flips. So that's at least as I see it, that's kind of the allure of some of that iBuying process. It's dangerous, though. It's dangerous, like you said. As we know, house flipping is not, okay, it's a little bit dangerous and can be risky. not saying it can't be successful, but if you bring it up to a tech company level, I don't know. I just feel like if Opendoor got so big, it could be just a total bomb for the market, right? Yeah. I just, the worry of possibly over-leveraging, I guess, is the concern.

Housing over-leveraged? And we've seen that story probably a million times, but my highlight is the, I really think they can be sort of the one-stop shop for all things residential real estate. And I do think that people are looking to sort of bottleneck a lot of the, or throttle down a lot of the house services or home services, like mortgage, title services. Yeah, streamlined, sorry, I guess I'm maybe using the wrong term there, but into just the same place. Like, I don't think you need this cluster of different, essentially, suppliers in that process. So, and Redfin seems like the most apt to be able to do all that. And low lights, I'm kind of searching here. I am reaching, I'd say, for a low light.

It's fragmented, and I don't know if it'll stay fragmented. I think there's always a component of real estate that's done in person. I think you're also going to see resistance. This usually doesn't end well, but you'll see resistance from traditional brokers. But Airbnb-ish. Yeah, a little bit. um but i once again i'd say i'm reaching and there is always the possibility that zillow is successful going they're sort of taking reverse paths i guess you could say redfin

is taking the really low commission brokerage approach uh and then leveraging that tech on top of it whereas zillow is basically all tech and now they're trying to scale back to the brokerage services if they're able to do that efficiently they obviously get more eyeballs than redfin so they have uh that funnel of customers but i don't know i like the way redfin's going at it a lot more than the way zillow is i kind of flip back and forth i really can't tell who has the better play you know redfin or zillow i all i know is they're better than open door i mean i've looked at trying to buy i've i'm i've looked at trying to buy a home if i were to do it do it through Redfin. Really? And it's like, Zillow is good for inspiration, good for kind

of finding areas maybe that I like, but I'm not going to go down and scroll down and like call that agent. I'm going to try to find something on Redfin. Okay. That's interesting to know. All right. I'll hit mine. I mean, I like the CEO style and candor on the rent path call or in general, really like the CEO, but I was just reading transcripts. So maybe, you know, need a little more digging to confirm that. I think they are going about it in a way that makes sense. Margin expansion outside of iBuying looks good to see. Lowlights, I'm really not sure anyone has found the right way to win the real estate market. Could be Redfin, but it feels like it's still a commodity to me. I don't know. If you just throw a bunch of capital at it,

I don't know. It feels like cars or planes a bit. all right maybe what but the commissioners but lower commissions is you know that's a big deal they can literally buy a house for a lower price uh but what kind of value differentiator yeah maybe that one and a half percent maybe that they're saving is a lot of money yeah if that's that's something that's definitely something that's probably the biggest thing um other low it's for me you know share account headwinds you guys know me i don't like share kind of and they're also a little bit at mercy of the mortgage market interest rate stuff like that i saw this quote from somewhere but it was from management or an audited thing it says we're

shifting from best efforts delivery to mandatory delivery where we take on more risk and then we're hedging that risk by trading mortgage-backed securities now that doesn't sound like bad or anything you know you're taking on some loans you might not leverage it or sorry not leverage it uh hedge it right in this situation but i worry as a tech company getting into financial services if this was goldman sachs well i don't know if this was a bank that's not so well either yeah i guess uh okay in general if it's someone with financial expertise or you know something like that like a bank i trust them more to do this but redfin it brings in more risk to the business i don't know why do these software engineers well maybe they can maybe they're fine but why are people at the

business but yeah but that's their bread and butter that's their bread and butter i do think though i mean if you just take everything else as at the core of the business they have a low commission brokerage service that people love yeah um and then they can use the most visited brokerage website as to leverage that like that's a really good model i think um yeah it's a good i think i mean yeah i was trying to bring some low lights but yeah i agree it's probably the best model out there. Also worth noting, I had to, I kind of had to dig for low lights and a lot of, it was not one where low light really popped up for me. Yeah. All right. More or less interested Ian, you go first. I still don't even know what I'm going to say about this, but I think I'll say,

um, maybe a little bit less interested and not hear me. Don't hear me wrong. I'm not saying the business is a bad business or I didn't think it was a good business, but I think I went into but really hoping to be wowed. And I don't think I was quite wowed. You know, I had high expectations and it wasn't, it wasn't, it wasn't a bad business by any means. And I liked the model and all that type of stuff, but just not quite, didn't quite wow me as I kind of wanted to. And part of that was due to the valuation that we talked about. Like it's not a, it's not as some sort of cheap valuation here. It doesn't, at least it doesn't appear that way to me. Yeah. The I agree on the, like i was looking to be wowed because i haven't seen it before but on twitter and in general

people are like wow redfin such a beast you know whatever all that stuff it's so great and i don't know the growth wasn't in ipop you know there's no ipopping yeah i do think investors today have maybe been brainwashed into thinking a sales multiple that isn't double digits is cheap. But you have to remember that a lot of that revenue isn't real, essentially. It's volume. And so gross profit's a number to pay attention to. And really, as Brett mentioned earlier, cashflow is a number to pay attention to. And they also have that stock-based compensation as well. So the price wasn't a screaming buy for me. But the business itself, I really, really like. So I don't know. It's hard to say, could they, what happens if they doubled their

market share? Could they do that? They've done that. They've grown well so far. And I like the service. I'm kind of, I'm more interested, but at the same time, I'm a little stuck on value. Yeah. I mean, I'm on the fence as well. I think it's similar to Ian. i don't know the okay what i what i'd be surprised if this is a hundred billion dollar business in 2030 market cap no what i'd be surprised if it's the same market cap as today no and that just worries me that with a high valuation uh the predictability of the business i can't get around it and that's not something i like to play but we yeah we do like things that are more predictable and this is there's a few factors that are hard to account for but yeah but again would i be

surprised if they had 10 market share or 100 billion dollar market cap by 2030 no i would be like that makes sense but do what i'm angry at myself for for not buying it yeah so yeah i don't know yeah somebody's got reminders to uh yell at us in 10 years when it's 100 billion dollar company please please dunk on us i will welcome it and if we got stuff wrong uh because we do get stuff wrong in the show please let us know politely on twitter uh don't yell at us please we don't like getting yelled at we're sensitive but uh yeah ian we're uh gonna wrap things up with the stock for next week what do you got yep so i'm thinking let's look at uh five below it's a discount retailer um not really into short-term trading but this is a little bit of a it's going

to get some tailwinds from reopening probably so um something to take a look at i think the annual report comes out this week so we'll get some fresh numbers to look at all right that sounds good five below i mean it's a it's a sneaky company that's done really well sort of like dollar general ish yeah it is kind of like that i feel like you and i you and i kind of looked at it the summer right yeah i looked at it a little bit last summer and we talked about it a bit and we we probably should have bought shares it's been on quite the run since last summer but But we'll take a look at it. We'll take a look at it,

maybe talk a little bit about why we did it at the time and why we're looking at it now. All right. Well, yeah, excited to talk about that next week. That's going to do it for this episode. Make sure, as always, use our promo code CCM at checkout to get $10 off your first month at 7investing. We are not financial advisors.

Ryan and I are general partners at Arch Capital Investors Fund. Clients in Arch Capital may hold securities discussed on this podcast. Ryan's laughing because of the emphasis I put in there. Yeah, you use the full name whenever. Yes. Well, there's our other archcapitals out there. So the one that we're in charge of, the clients in it, Mayo and Securities discussed on this podcast.

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