Market Cap Discount

Name Ticker Date Price Value Action S/O ($MM) EV ($MM) Rate
Redfin RDFN 8/18/2017 $26.70 $22.18 Sell 93.6 2,499 2,304 12.0%

Bear Base Bull M&A

Method DCF P/E EBITDA Comps (P/S) DCF P/E EBITDA Comps (P/S) DCF P/E EBITDA Comps (P/S) P/S
Multiple 20.0x 12.0x 4.0x 30.0x 15.0x 8.0x 40.0x 16.0x 10.0x 8.0x
Value ($ millions) 471 793 1,092 1,405 1,185.55 1,774.80 1,849.16 2,809.28 2,043.51 3,507.26 3,702.32 3,511.60 3,512
Value per Share $5.03 $8.31 $11.21 $15.01 $12.67 $22.15 $22.48 $30.01 $21.83 $36.01 $38.78 $37.51 $37.51
Weighting 20.0% 60.0% 10.0% 10.0%

Executive Summary
Redfin (RDFN) is worth $22 per share with a wide range of outcomes that skews to the downside. Despite RDFNs huge
runway to gain market share in the industry, the current price of $26.70 discounts the company achieving best-in-class
operating margins and experiencing zero end-market cyclicality for the next decade. If the real estate market slows, the
bear case becomes a distinct possibility. The company should trade at a premium to traditional real estate brokerages
because of its growth, but it is still a real estate brokerage with competitive dynamics that cause productivity
improvements to accrue primarily to agents. Giving the company credit for achieving industry-standard margins in ten
years results in a price target of $22 with 17% downside from current prices.

Business Description
Redfin is a discount real estate brokerage whose mission is to simplify and reduce the cost of real estate transactions.
The National Association of Realtors (NAR) estimates that 5.5 million transactions valued at $1.25 trillion occurred in
2016, and Redfin estimates consumers paid more than $75 billion in real estate commissions in 2016, 6% of transaction
value. Within this market, RDFN estimates its own market share by value at only 0.55% as of December 2016.

The companys core value proposition leverages a digital real estate platform to profitably charge sellers 1.0-1.5%
commission vs. 2.5-3.0% traditionally (RDFN still charges 2.5-3.0% buyers commissions). The company continues to
streamline transactions through automated home showing scheduling, more accurate valuation data, fast-offer
capabilities, and digital title and settlement. Redfin touts that its agents handle 3x more transactions and earn twice as
much as competing agents. Over time, CEO Glenn Kelman is creating a completely digital real estate transactions that
will streamline current real estate purchases, and drive business towards the low-cost provider, Redfin.

Competition
Competition is fierce in the real estate brokerage business, the industry is highly fragmented, and rival brokerages
constantly poach top talent. The largest players are Coldwell Banker, 21st Century, Re/Max, ERA, Berkshire Hathaway
(BHHS), and none of these brands individually claims more than 10% U.S. market share (All but BHHS and Re/Max are
owned by RLGY). Other tech-enabled brokerages have popped up in recent years, most notably Compass, a real estate
brokerage founded by Ori Allon, a serial entrepreneur who has sold businesses to Google and Twitter. Compass is
competing more traditionally with other brokerages on commission levels so far. While the traditional brokerages seem
stodgy, they are most comparable to Redfins business model and likely future margin structure.

Zillow, Trulia, Realtor.com, and Redfin compete for customer traffic to listing sites in general. While these other sites
compete for internet traffic, they do not participate in transactions, a fundamental differentiator for Redfin.
Nevertheless, some of these competitors have scaled faster than Redfin and have greater resources to invest in new
features or acquisitions, so they may force the company to compete more heavily for traffic to its listings site.

Its low-cost commission structure is Redfins main competitive advantage because it may be able to achieve profitability
at a commission level that is prohibitively low for a start-up brokerage to sustain. Competing technology-enabled
brokerages will probably become more common in the real estate market, so it is essential that Redfin reduces the
incentive to enter the market by taking enough share at low prices that it deters significant competition.
Assumptions
Is Redfin a technology company with the potential to be the dominant low-cost provider in the real estate brokerage
market, or is it an evolution of the existing model that may take share over time, but whose margin structure mirrors the
incumbents? Redfin is an incremental improvement on the existing brokerage model, with a similar margin structure.

Redfin benchmarks most closely to Realogy Holdings (RLGY) because RLGY owns many of its brokerages, as opposed to
Re/Max which is primarily a franchisor and earns much higher margins as a result. Gross margins at Redfin and Realogy
are 30-32%, and given RLGYs normalized operating margins fluctuated between 8-12% over the last decade, Redfins
long-term margins achieve these levels in the analysis. Operating leverage in technology, marketing, and/or G&A results
in these margin improvements over a 10 year timeframe, and result in bottom-line profitability starting in 2020.

Valuation
The valuation methods used in this analysis include DCF, P/E, EV/EBITDA, public comps, and M&A precedents. Each cash-
flow based valuation method resulted in similar results, except in the bull case, where cash flows increased significantly
and operating margins increased to 16-17% by 2027, well above 12% peak margins competing brokerages have
experienced. The base case assumes a 24% 10-year revenue CAGR and 10% 2027 operating margins, and results in price
targets 15-20% below todays price.

Bear Base Bull

Method DCF P/E EBITDA Comps (P/S) DCF P/E EBITDA Comps (P/S) DCF P/E EBITDA Comps (P/S)
Multiple 0 20 12 4 30x 15x 8x 40x 16x 10x
Value 470.75 793.42 1,092.06 1,404.64 1,186 1,775 1,849 2,809 2,044 3,507 3,702 3,512
Value per Share $5.03 $8.31 $11.21 $15.01 $12.67 $22.15 $22.48 $30.01 $21.83 $36.01 $38.78 $37.51

Redfin has a technology and low-cost advantage over its public brokerage peers, RLGY and RMAX, and the business can
continue to grow well above the industry until industry commissions reach RDFNs levels. RDFN trades at a significant
P/S premium to RLGY despite being in the same business. If the bull case is correct, operating margins will be 50-100%
higher than RLGYs. If both were mature businesses, RDFN would rightly trade at 1.5-2.0x RLGYs P/S. Because of its
significant, secular growth potential, the business could very well deserve to trade at 7.0x 2017 sales. However, no
compelling reason exists to believe Redfins margin structure will be 500 bps higher than competitors.

RDFN Z RLGY RMAX CSGP LON:RMV ASX: REA

2017E Sales Growth 31.4% 25.2% 5.9% 10.6% 14.2% 10.0% 16.1%
2016A P/S 9.4x 8.2x .8x 5.9x 10.9x 17.3x 13.4x
2017E P/S 7.1x 6.6x .8x 5.3x 9.5x 15.7x 11.6x
2016A P/E N/A N/A 20.6x 45.7x 66.2x 29.3x 39.5x
2017E P/E N/A N/A 21.5x 29.6x 65.9x N/A 31.5x
2016A EV/EBITDA N/A 47.0x 10.9x 12.7x 34.7x 23.4x 24.1x
2017 EV/EBITDA N/A 30.7x 11.0x 11.6x 33.8x N/A 20.1x
2016A EBITDA % -6.2% 17.1% 13.3% 53.7% 30.5% 73.5% 56.7%
2017E EBITDA % -3.8% 21.0% 12.4% 53.0% 27.4% N/A 58.5%

None of the below transactions is a perfect comp for RDFN and the best comp, Movoto, was acquired by a Japanese
company with no details on the transaction. Overall, real estate sites have been sold for 4-10x revenue, which indicates
RDFNs current 7.1x forward multiple values the business in line with M&A comps.
Close Date Target Acquiror Value Revenue EBITDA EBITDA % P/S EV/EBITDA
Apr. 2012 LoopNet CoStar 860 87 9 10.7% 9.9x 92.5x
Feb. 2014 Movoto Recruit Group N/A N/A N/A N/A N/A N/A
Apr. 2014 Apartments.com CoStar 585 86 28 32.6% 6.8x 20.9x
May 2014 RE Digital Nationstar 18 N/A N/A N/A N/A N/A
Aug. 2014 ZipRealty Realogy 166 76 1 1.1% 2.2x 207.5x
Nov. 2014 Move.com News Corp. 950 227 11 4.8% 4.2x 86.4x
Feb. 2015 Trulia Zillow 2,500 252 30 11.8% 9.9x 84.2x
July 2015 Apartment Finder CoStar 170 79 24 30.7% 2.2x 7.0x
Various RE Brokerages Various N/A 12 N/A N/A N/A 6.0x
Jan. 2017 Hesta Home RealScout N/A N/A N/A N/A N/A N/A

Management Team / Incentives / Ownership

Executives are compensated based on top-line metrics, including annual revenue growth targets, Net Promoter Scores,
monthly average visitors, and gross margin in certain of RDFNs large markets. Overall, these are sensible metrics and
should make sure that customers are consistently having good experiences.

Between vested options and existing shareholders, over 83 million shares, 89% of shares outstanding, can be sold when
the lockup expires in January 2018, subject to a restriction that no shareholder may sell 1% of shares outstanding in any
3-month period. In short, the lock-up could temporarily depress prices.

Risks
Housing Slump - The biggest risk over a three year time horizon is a housing slump, which would hit Redfin more acutely
in 2017 than it did in 2007-2009 because the company was so small at the time. Commercial and residential brokers
such as RLGY, CBG, JLL, and RMAX tend to be better investments coming off very low transaction volume periods.

Antitrust/Industry Pushback - The bull case that assumes Redfin achieves significant national market share means the
company could face significant pushback from the National Association of Realtors. At its most punitive, NAR could
remove Redfins real estate license in one or more geographies.

Competition - In the last 5 years, numerous smaller digital-first brokerages have popped up. Assuming the challengers
technology is approximately as good as Redfins, the market may not evolve into a winner-take-all environment, but will
instead feature several very competitive tech-savvy brokerages. It seems especially likely as these brokers attempt to
scale that they will compete fiercely to recruit talented agents, which could reduce Redfins profitability.

Reduced Friction (Upside Risk) As an upside risk, Redfins low cost reduces friction. As discount brokerages reduced
friction in trading stocks, Redfin could reduce the friction in buying or a selling a house. At the margin, this could
increase overall transactions and allow U.S. transaction volumes to grow well their historical rates.

Remove Role of Agents (Upside Risk) - Additional upside risk exists if Redfin can remove agents from the process
entirely. If the company is able to remove agents, it can keep 100% of the commission for itself and afford to reduce
commission even further. This change would face tremendous resistance from existing Redfin agents and the NAR.

Conclusion
Redfin is a better-than-average real estate brokerage with strong growth prospects as a low-cost provider in the real
estate brokerage industry. However, its current valuation assumes significantly higher margins than its most direct
competitors, all while residential real estate prices continue to hit all-time highs. With the valuation stretched and a
lock-up looming that will likely depress the share price temporarily, Redfin is a sell today. This would be a terrific
business to own when profits across the brokerage industry have hit cyclical lows, as Redfin is likely to take share on the
way up. But there are better, less-cyclical businesses than Redfin at this point in the business cycle.
Income Statement 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
Brokerage revenue 115,701 171,276 244,079 322,150 423,667 548,544 699,050 876,601 1,084,727 1,342,453 1,647,779 2,005,811 2,421,260 2,917,228
Partner revenue 6,103 10,170 16,304 21,515 23,469 25,600 27,666 29,899 32,009 34,269 36,343 38,541 40,873 43,346
Total real estate revenue 121,804 181,446 260,383 343,665 447,136 574,144 726,716 906,499 1,116,736 1,376,722 1,684,122 2,044,352 2,462,133 2,960,574
Other revenue 3,559 5,892 6,813 7,494 8,244 9,068 9,975 10,972 12,070 13,277 14,604 16,065 17,671 19,438
Revenue 125,363 187,338 267,196 351,160 455,380 583,212 736,691 917,472 1,128,806 1,389,999 1,698,726 2,060,417 2,479,804 2,980,012
Cost of revenue 93,272 138,492 184,452 238,789 305,104 384,920 478,849 596,357 733,724 903,499 1,104,172 1,339,271 1,611,872 1,937,008
Gross profit 32,091 48,846 82,744 112,371 150,275 198,292 257,842 321,115 395,082 486,500 594,554 721,146 867,931 1,043,004
Operating expenses:
Technology and development 17,876 27,842 34,588 44,403 56,216 70,247 85,050 101,333 119,030 139,623 162,140 186,361 211,894 239,736
Marketing 15,058 19,899 28,571 36,872 47,359 60,071 75,142 92,665 112,881 136,220 163,078 193,679 228,142 268,201
General and administrative 24,240 31,394 42,369 53,049 65,606 79,940 95,821 112,912 131,019 151,606 173,387 195,882 218,394 241,587
Total operating expenses 57,174 79,135 105,528 134,325 169,181 210,258 256,013 306,910 362,930 427,448 498,605 575,922 658,430 749,524
EBITDA (22,411) (25,894) (16,491) (13,174) (7,066) 3,781 22,457 41,729 66,016 100,751 146,911 207,037 283,895 382,881
EBIT (25,083) (30,289) (22,784) (21,953) (18,906) (11,966) 1,829 14,205 32,152 59,051 95,949 145,224 209,501 293,480
Other income 47 53 258 339 440 563 711 886 1,090 1,342 1,640 1,990 2,394 2,877
EBT (25,036) (30,236) (22,526) (21,614) (18,466) (11,403) 2,541 15,091 33,242 60,393 97,589 147,214 211,896 296,358
Income Tax 306 - - (8,213) (7,017) (4,333) 965 5,735 12,632 22,950 37,084 55,941 80,520 112,616
Net Income (24,730) (30,236) (22,526) (13,401) (11,449) (7,070) 1,575 9,356 20,610 37,444 60,505 91,273 131,375 183,742
Diluted EPS (0.14) (0.12) (0.07) 0.02 0.09 0.20 0.36 0.56 0.83 1.17 1.61
Shares Outstanding 93,607 95,479 97,389 99,337 101,324 103,350 105,417 107,525 109,676 111,869 114,107
2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
Brokerage Revenue Growth % 48.0% 42.5% 32.0% 31.5% 29.5% 27.4% 25.4% 23.7% 23.8% 22.7% 21.7% 20.7% 20.5%
Partner Revenue Growth % 66.6% 60.3% 32.0% 9.1% 9.1% 8.1% 8.1% 7.1% 7.1% 6.1% 6.1% 6.1% 6.1%
Other Revenue Growth % 65.6% 15.6% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Revenue Growth % 49.4% 42.6% 31.4% 29.7% 28.1% 26.3% 24.5% 23.0% 23.1% 22.2% 21.3% 20.4% 20.2%
Brokerage Transaction Growth 0.0% 0.0% 36.0% 33.0% 31.0% 29.0% 27.0% 25.0% 24.0% 23.0% 22.0% 21.0% 20.0%
Partner Transaction Growth 39.6% 3.6% 10.0% 10.0% 9.0% 9.0% 8.0% 8.0% 7.0% 7.0% 6.0% 6.0% 5.0%
Gross profit 25.6% 26.1% 31.0% 32.0% 33.0% 34.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
Technology and development 14.3% 14.9% 12.9% 12.6% 12.3% 12.0% 11.5% 11.0% 10.5% 10.0% 9.5% 9.0% 8.5% 8.0%
Marketing 12.0% 10.6% 10.7% 10.5% 10.4% 10.3% 10.2% 10.1% 10.0% 9.8% 9.6% 9.4% 9.2% 9.0%
General and administrative 19.3% 16.8% 15.9% 15.1% 14.4% 13.7% 13.0% 12.3% 11.6% 10.9% 10.2% 9.5% 8.8% 8.1%
Total operating expenses 45.6% 42.2% 39.5% 38.3% 37.2% 36.1% 34.8% 33.5% 32.2% 30.8% 29.4% 28.0% 26.6% 25.2%
EBITDA -17.9% -13.8% -6.2% -3.8% -1.6% 0.6% 3.0% 4.5% 5.8% 7.2% 8.6% 10.0% 11.4% 12.8%
EBIT -20.0% -16.2% -8.5% -6.3% -4.2% -2.1% 0.2% 1.5% 2.8% 4.2% 5.6% 7.0% 8.4% 9.8%
Other income 0.0% 0.0% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
EBT -20.0% -16.1% -8.4% -6.2% -4.1% -2.0% 0.3% 1.6% 2.9% 4.3% 5.7% 7.1% 8.5% 9.9%
Tax Rate 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0%
Net Income -19.7% -16.1% -8.4% -3.8% -2.5% -1.2% 0.2% 1.0% 1.8% 2.7% 3.6% 4.4% 5.3% 6.2%