3 Factors Driving RBC's Redfin Upgrade

Shares of Redfin Corp RDFN have lost more than 30 percent since the turn of the year, which has an RBC Capital Markets analyst urging investors to take advantage of the correction.

The Analyst

RBC Capital Markets' Mark Mahaney upgraded Redfin's stock rating from Sector Perform to Outperform with an unchanged $28 price target.

The Thesis

Investors should consider taking advantage of the weakness in Redfin's stock for three compelling reasons, Mahaney said in a Feb. 2 note. (See the analyst's track record here.) 

The "material pullback" in the stock implies a valuation of 2.7x 2019 P/S and 36x 2019 EV/EBITDA, which may not be justified given expectations for 30-percent revenue growth, the analyst said. Redfin's valuation makes the stock "one of the most attractive" opportunities within the small-mid cap internet space, he said. 

Although home sales data appear to be weak, fourth-quarter trends rose 0.7 percent year-over-year, which represents an improvement from the third quarter reading, which was down 2.4 percent year-over-year, Mahaney said. Moreover, comScore web traffic trends for Redfin point to an acceleration in traffic growth in Q4 (from 27 percent in Q3 to 42 percent.)

Redfin's status as a "leading technology-powered real estate brokerage" backed by "robust" fundamentals remains unchanged, according to RBC. The company continues to leverage its growing scale to gain market share and improve gross margins. This bodes well for Redfin moving forward, as it is positioned in a "massive sector ripe for disruption," which should create long-term shareholder value, Mahaney said. 

Price Action

Shares of Redfin were trading higher by 0.15 percent Monday morning.

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