Redfin (RDFN $12-14) is planning to come public this week. The company is basically an online platform for residential real estate sales.

Elephant #1: Zillow

Anyone familiar with this space would know that it's dominated by Zillow (Z) which has been an active consolidator in the space (they acquired their main competitor Trulia in 2014.) Zillow is a much larger online presence with 166M average monthly visits versus 21M for Redfin.

In addition to a much larger consumer footprint, more listings and improving relationships agents it is a strong and entrenched competitor for Redfin. Zillow has is also evolving their model away from simple display advertising to agent fees/commissions, mortgages and rental properties. Finally, Zillow has plenty of M&A firepower.

Elephant(s) #2: Realogy, Re/Max:

Redfin has a hybrid model which includes employing their own agents (Redfin has over 2,000 employees). That makes them similar to Realogy (RLGY) or Re/Max (RMAX). Realogy has over 14,000 affiliated offices and 274,500 agents. Re/Max claims over 100,000 agents in the field. Both of these large real estate brokerage firms are worldwide and dominate many local markets.

Strangely Redfin doesn't mention any of these companies in their IPO roadshow presentation. We even took the time to create a complete roadshow transcript. The central point of their investment story is that they have built a unique and improved platform which is more efficient and delivers much-improved customer service. This was a good argument ten years ago but is less true today.

The real estate industry woke up some time ago thanks to the success of Zillow. Successful agents realized that they would actually have to work hard for their clients and earn their commissions. The large brokers like Realogy have embraced technology to improve their own process. For example, Realogy sponsors an industry innovation summit. Looking down the list of the 15 finalists this year it's apparent that many represent features that can be added to existing platforms to replicate much of what Redfin offers.

• Agentology – Lead management and qualification for real estate brokers and agents. (San Diego, Calif.)
• Boost by HomeSpotter – Social marketing automation for real estate brokers and agents. (Minneapolis, Minn.)
• BrokerSumo – Back-end management platform for real estate brokerages. (San Jose, Calif.)
• Brokers Technology – Mobile-first transaction management developed by real estate agents. (St. George, Utah)
• Carey – Facebook Messenger Bot platform for real estate.  (Newport Beach, Calif.)
• Hurdlr, Inc. – Mobile application that provides real estate agents with insights into their business performance. (Bethesda, Md.)
• ListingZen – Application that uses machine learning to streamline the creation of listing and marketing materials for real estate agents and teams. (Pasadena, Calif.)
• myPlanit – A mobile app that organizes and analyzes a real estate agent's activity, photos, and contacts. (New York, N.Y.)
• RealtyMe – An app designed for home sellers to track the progress of their real estate transaction with real-time social-media-style updates. (Camarillo, Calif.)
• Remzy – Software that connects home buyers with owners of homes who have not listed, but may want to sell. (Miami, Fla.)
• Snap21 – An app for easily requesting, and then promoting online reviews. (Lancaster, Pa.)
• Structurely – An artificial intelligence assistant for real estate agents. (Johnston, Iowa)
• Transported – A virtual reality application that works with any camera or VR device. (Los Angeles, Calif.)
• VimChat – Simplifies and organizes SMS communication between consumers, real estate agents or brokers. (Burlingame, Calif.)
• VirtualAPT – A robot-driven virtual reality solution. (Brooklyn, N.Y.)

Elephant #3

Redfin (along with the other large players in the business) has launched a mortgage service for qualified buyers. Their mission is to streamline the process and create "a completely digital process for buying or selling a home." IPO Candy readers may remember Ellie Mae (NYSE: ELLI $111.21) which came public in 2011. Back then they were already in the process of tackling this very hard problem. Years later Ellie Mae is well on their way to owning a concentrated share of this market. Their capabilities are vastly ahead of the initial foray Redfin is making into this market.

We'd also note that Intuit (INTU) has been investing in the consumer-facing side of this with their own Rocket Mortgage product. If Redfin were just a technology company they would be a very strong acquisition candidate for Intuit. However, the agent-based approach is very different from how Intuit does things.

Conclusion

It's clear that Redfin will be facing some serious competition on multiple fronts. They are an innovative company and it's a large market which means there can be room for them too. It's disturbing to see all these salient competitors omitted entirely from the roadshow presentation as if they didn't exist.

Turning to valuation our QuickIV suggests the stock can work and trade to $20. It's hard to know what level of operating margins will accrue to their business as they scale so right now we can only make an educated if somewhat generous guess of 15%.