The COVID-19 pandemic has accelerated demand in the housing market due to low interest rates and the Fed's stimulus. Even with reducing economic stimulus, the real estate industry should continue to experience strong demand amid a shortage in supply. The U.S. has a shortage of 5.24 million homes, according to research from Realtor.com. The industry’s high demand is evidenced by the iShares U.S. Real Estate ETF (IYR) 29.5% gain year-to-date.

With that in mind, today I’m going to analyze and compare Redfin Corporation (RDFN) and Zillow Group, Inc. (Z).  Founded in 2002, RedFin provides real estate brokerage services in the U.S. and Canada. In addition, the company operates an online real estate marketplace, allowing it to charge lower listing and commission fees due to the economies of scale. This direction towards digitalization has stimulated the company to grow substantially over the past five years. 

Headquartered in Seattle, Washington, Zillow operates as a digital real estate company, offering real estate brands on mobile apps and websites in the U.S. It operates across three different segments: Homes, Internet, Media & Technology, and Mortgages.  

Recent Developments 

On October 5th, Redfin announced that it had expanded its Direct Access feature to 22 markets thanks to a partnership with ADT. This feature enables customers to unlock the door via the Redfin app, allowing them to make self-tours to Redfin-listed homes. At the same time, homes are protected with ADT smart home security service. Homes with Direct Access can get a significantly higher amount of tours, leading to more quickly selling as a result.  

On December 2nd, Zillow provided an update on Zillow Offers inventory wind-down “and has sold, is under contract to sell or has reached agreement on disposition terms for more than 50% of the homes”. With the running wind-down progress, the company revised its revenue guidance for Q4, expecting to generate revenues in the range between $2.3 billion and $2.9 billion, up from its previous forecast of $1.7 - $2.1 billion. Also, management announced a $750 million shares repurchase program. 

Recent Financial Performance 

On November 4th, Redfin issued its third-quarter earnings report. In Q3, the company's total revenue grew 127.9% year-over-year to $540 million. RDFN's total real estate services segment revenue has been reported 23% higher YoY at $257.8 million, while its properties revenue segment revenue increased 1,154% YoY to $238.42 million. Also, RDFN topped the Wall Street revenue estimates by $4.89 million. The company reported a GAAP EPS of ($0.20), missing analysts' consensus by $0.01.

Currently, Wall Street expects Redfin's earnings to decrease in the fourth quarter of 2021 to ($0.32) per share compared to its year-ago figure of $0.11. However, analysts forecast that its Q4 revenue should increase 144.50% YoY to $597.91 million.

For its fiscal third quarter ended September 30th, 2021, Zillow’s total revenue increased 164% year-over-year to $1.74 billion, however, the company missed Wall Street consensus by $270 million. The increase in revenue was primarily driven by a 534% rise in total homes segment revenue. Besides, the company's IMT segment and Mortgages segment revenues grew by 16% and 30% compared to the year-ago quarter, respectively.  

However, its net loss before taxes stood at $339.19 million compared to a net income of $40 million as of 3Q2020. As a result, Z’s Non-GAAP EPS has been reported at ($0.95), missing consensus by $1.12.

Analysts established a consensus EPS estimate of ($1.04) for the next quarter, ending December 31st, 2021, representing a significant decrease compared to the year-ago figure of $0.41. On the other hand, the $2.59 billion average revenue projection for the fourth quarter represents a 227.90% increase year-over-year. 

Comparing Valuations & Profitability

In terms of TTM EV/Sales, RDFN is currently trading at 3.60x, which is slightly higher than Z, whose multiple is currently standing at 3.56x. Moreover, both real estate companies look undervalued compared to the sector's median of 12.57x. 

When it comes to the TTM P/S multiple, Z's P/S multiple of 2.97x is about 6% higher than RDFN's 2.79x. Both companies look discounted compared to the sector’s median of 7.25x.

Zillow is also more profitable, with a gross profit margin of 36.45% versus RDFN’s respective figure of 24.66%. 

The Bottom Line

I believe Zillow, at these levels, is a better long-term buy. The company has recently revised its revenue guidance, which can be considered a bullish sign. It also has slightly better financials and expected revenue growth rates. In terms of valuation, Z looks cheaper than RDFN based on the EV/Sales multiple, while Z has a better gross profit margin. 

RDFN shares were trading at $40.49 per share on Friday morning, down $0.43 (-1.05%). Year-to-date, RDFN has declined -41.00%, versus a 26.65% rise in the benchmark S&P 500 index during the same period.

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.

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