Redfin (NASDAQ: RDFN) has been a winning stock in 2020, and the company has a bright future. The challenge now is for the company to turn that potential into reality.
In this Nov. 12 discussion on Motley Fool Live during the recording of the Industry Focus podcast, Motley Fool analyst Tim Beyers tells Industry Focus host Nick Sciple what he is looking to see from Redfin over the next five years.
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Nick Sciple: When you look out over these next five years or so, what are you going to be focusing on with this business to see that your thesis is going to play out and that it’s still on the right track?
Tim Beyers: Yeah, that’s a great question. So, things that I’m looking at are the balance sheet and the portfolio. So, I want to see how they manage inventory, and not just the housing inventory, I want to see how they manage their carrying of loans, like, how quickly do they turn loans? And so far, they’ve been very good at it. And you know, frankly, if they can write loans at scale, banks are going to love them, because if banks don’t have to do any origination and Redfin can do origination at a very low cost and write a low-cost loan that becomes more profitable for the bank, and the bank can just carry at a profit, that’s an amazing deal for a bank, and it’s a good deal for Redfin. So, there’s a big win-win here. So, I want to see how fast they are turning their loans and turning those loans into cash.
Same thing with the inventory, if I see good turns there, it’s going to tell me a lot, because I believe that at some point, maybe within, say, the next five years, Nick, you’re going to see significant gains in cash flow, like, you will see the cash flow really start to balloon and start to blossom here, even as the market, the housing market starts to normalize. The key is the degree to which Redfin can convince people to give them more of the transaction. If you get more of the transaction, the volume is not as important, right now the volume is really driving this business, it’s not always going to be that way, so watch for how well they do in terms of getting people to give them more of the transaction.
Lou Whiteman owns shares of Redfin. Nick Sciple owns shares of Redfin. Tim Beyers owns shares of Redfin. The Motley Fool owns shares of and recommends Redfin and recommends the following options: short November 2020 $35 puts on Redfin. The Motley Fool has a disclosure policy.