Redfin , the Seattle-based real estate website, dazzled investors recently during its highly successful IPO. The company offered 9.2 million shares for $15 each, raising $138.5 million, and the stock soared 44.7% to $21.70 per share on its first day of trading.
Founded in 2002, Redfin is now valued around $2 billion. The online and mobile-based real estate company’s goal is to succeed in a crowded real estate market using a tech-centered business model in order to attract customers.
So how does Redfin compare to one of its biggest competitors, Zillow (ZG - Free Report) ? Let’s take a look at some of the key differences between the two online real estate companies.
One of the biggest differences between Zillow and Redfin is how the companies attract customers. Redfin looks to attract consumers by saving them on a commission fee, whereas Zillow primarily attracts real estate agents and brokers by offering advertising opportunities.
Unlike traditional real estate companies that pay strictly on commission, Redfin pays its real estate agents a yearly salary with benefits. Redfin’s revenue comes from collecting commissions on deals that its agents closed.
As a result, Redfin can offer consumers a reduced commission fee. Redfin charges an average commission rate of 1.5%, half of the typical rate buyers pay with a traditional local real estate agency. Redfin also rebates buyers in states where rebates are allowed, averaging $3,500.
On its website Redfin states, “We believe that the Internet is more efficient at connecting consumers with agents than the prospecting activities of most agents, and that this efficiency can benefit the consumer most when a website is operated by the brokerage representing that consumer in a purchase or sale.”
This strategy contrasts sharply with Zillow. The company doesn’t employ agents directly; instead, it views real estate agents, mortgage brokers, and contractors as consumers who will pay for advertisement opportunities.
While both companies are multiple listing service (MLS) mobile applications, Zillow accepts data from a variety of other sources, such as brokers and agents, that Redfin may not. As a result, Zillow can offer consumers more listings even if the prices are not as competitive.
Popularity and Customer Base
As the more well known company, it comes as no surprise that Zillow currently attracts more users. According to The Motley Fool, Zillow has almost doubled its monthly active users in the last few years. In 2014, the site attracted 76.7 million people. By the end of 2016, Zillow garnered 140.1 million MAUs.
In comparison, Redfin has a much smaller user base. As of 2014, Redfin attracted about 8.7 MAUs. The company did manage to almost double that number by the end of 2016, reaching 16.2 million.
According to Geekwire, Redfin has more than doubled its revenue since 2014. Back then, the real estate company reported revenue of $125 million. By the end of 2016, Redfin had increased its revenue to $267 million.
On the other hand, Zillow made $847 million last year. However, Zillow had a larger loss of $220 million, or about 26% of the company’s total revenue. In comparison, Redfin’s loss totaled $23 million, or about 9% of its total revenue.
Future Growth Opportunities
Zillow’s business model allows the website to expand into new markets more easily as it offers agents and brokers the chance to create advertisements themselves online. This puts little strain on the company’s resources. This strategy, among other things, has helped the company earn an “A” grade for Growth in our Style Scores system.
Redfin, on the other hand, will incur more costs as it expands. Because the company hires individual real-estate agents, the company will need to hire local agents and rent new office space to work in new markets or to take on additional clients.
Additionally, Redfin doesn’t have much pricing power because its popularity is based upon the company keeping costs down for consumers. Zillow’s revenues, on the other hand, doesn’t depend on the price of a listing but on the number of people wanting to advertise on the site.
Despite the fact that Zillow is four years younger than Redfin, its business model has allowed the company to outpace Redfin in both popularity and revenue.
For Redfin to continue its success, and to remain competitive with Zillow, it will need to overcome the possible costs of expansion into new markets and grapple with the long-term popularity that Zillow has built for itself.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
It's not the one you think. See This Ticker Free >>