RBC Highlights Redfin Risks And Rewards

The firm initiated coverage of the company with a Sector Perform rating and a $28 price target.

In pre-market trading, shares of Redfin were sliding 7.44 percent to $25.51.

Analyst Mark Mahaney believes the company's fundamentals are solid and its business model has been steadily scaling, both in terms of market share and gross margins. The analyst sees real estate is a massive sector ripe for disruption.

If the company's seasoned management team continues to execute well, Mahaney thinks it should create long-term shareholder value.

Key Positives

RBC Capital Markets outlined the key investment positives and risks. The firm sees the move of real estate online as one of the key positives, with the company primed to take advantage of this. The firm indicated that the company has a leading online position, as it saw a 46 percent year-over-year increase in online traffic in the second quarter.

The firm also pointed to Redfin's massive total addressable markets, which it values at $75 billion in annual home sale commissions. Additionally, the firm sees the company as offering a compelling value proposition to buyers and sellers, helping them save cash and time, all for a 1–1.5 percent commission charge for sellers and commission refunds to buyers.

Finally, RBC said it is seeing evidence of scale, with oldest cohorts seeing gross margin expansion from 29 percent to 35 percent between 2014 and 2016.

Risks

• Heating up competitive landscape from online portals such as Zillow Group, Inc. Z and Realtor.com and the major established brokerages for clients.
• Market share in the low-single digits in the oldest markets.
• Macro risks facing the housing market.
• Unlikelihood of the company making material profits until 2019.
• Large net platform risk.

Near term, the firm believes the shares of Redfin, which have risen about 80 percent since the IPO, are reasonably valued.