2 real estate tech stocks primed for a resurgence
This article is excerpted from Tom Yeung’s Profit & Protection newsletter. To be sure not to miss anything of Tom’s picks, subscribe to his mailing list here.
Cyclical stocks are just a bad idea right now…
Oil prices fell again yesterday. Western Texas Intermediate prices shed 6% minutes before the opening bell, sending stock to prime Exxon Mobil (XOM) in stock memes Indonesian Energy Company (INDO) in free fall.
There’s a reason the Benefit & Protection base list does not contain any oil producing stocks.
These headline-grabbing moves are only part of a broader meltdown in cyclical assets. Wood prices have fallen by 50% in recent months. And the stock prices of lithium and rare-earth miners — once seen as growth catalysts for the electric vehicle industry — are moving in the opposite direction. Lithium miner price Sociedad Quimica y Minera de Chile (m²) have fallen by 30% since the end of May.
But fears of a recession create fantastic business in countercyclical companies that work in cyclical companies. Markets often penalize entire sectors without taking into account the various qualities of the companies that make them up.
Today we’ll look at two tech companies that have fallen at the same pace as other real estate stocks. With their strong operations, these stocks have become picks for investors to watch.
2 real estate tech stocks primed for a resurgence
On Thursday, I profiled five high-potential tech companies in the real estate market:
- eXp World Holdings (EXPI). A+
- Airbnb (ABNB). A
- Redfin Corp. (RDFN). A
- Zillow Group (ZG). B+
- Application Folder (APPF). B+
These companies have remained growing rapidly despite turbulence in the markets they serve. All are expected to post double-digit earnings growth over the next few years, earning high marks quantitatively. Benefit & Protection stock ranking system.
All five companies are also asset-light businesses that can generate high returns on invested capital (ROIC) – a key ingredient of my Perpetual Money Machine strategy. By avoiding the capital-intensive labor of building homes, these service-oriented businesses are much better at turning small investments into big profits.
But the stock prices of these high-flying companies have been penalized for their proximity to the real estate market. Just as many successful companies lost value in the early 2000s, fears of contagion are now pushing shares of high-quality tech gear into garage sale territory.
Long-term trading: Appfolio (APPF)
Nowhere is this clearer than at Application Folder (APPF), a technology company providing building management software to real estate companies.
The AppFolio Property Manager serves as a system of record for property management services. The system records transactions, rental requests, work orders, inspections and other daily tasks. AppFolio also offers value-added services, including electronic payment services, tenant screening and insurance products.
In other words, if you’ve ever rented an apartment, chances are you’ve come across Appfolio or one of its competitors.
And business was quick.
Appfolio has nearly doubled its revenue since 2019. Analysts expect another 20% increase by 2023. EBITDA earnings are expected to grow 6x by 2024, putting the company among the best “growth” ratings in the market. Benefit & Protection rating system.
There are five reasons to remain optimistic about the company:
- Minimal exposure to real estate prices. Appfolio charges owners on a unit basis rather than the value of the underlying property. Property management companies always need CRM software during market downturns.
- Software quality. In 2019, Garner named the company a Top Pioneer in Residential Property Management. Software consulting firm Software Connect named it “one of the best property management software options on the market.”
- Rental trend. A study by iPropertyManagement found that only 64% of Americans now own their homes, down 2.8% from the previous year. Home builders take note; The US Census Bureau found that multi-family housing starts in May 2022 were up 19.8% from a year earlier, while single-family housing fell -7.9%.
- Covid-19 behavior. The Covid-19 pandemic has increased the demand for contactless services. Today, even smaller property owners are turning to AppFolio’s software to manage payment and billing for 1 or 2 properties.
- Scalability. Appfolio’s software business allows it to scale quickly to meet demand. The company has managed to maintain positive free cash flow since 2017, while doubling its revenue. No home builder can be expected to do the same.
The company’s valuation is also reasonable given its rapid growth. In 2020, buyout firm Thoma Bravo took on a slower-growing rival actual page private in an all-cash, $10.2 billion deal. A similar top tier valuation would value Appfolio at $113 per share, up 25%. And once its faster growth is factored in, Appfolio’s valuation is closer to $150 per share.
However, Appfolio only gets a “B+” overall due to its average value and quality scores. This suggests that the APPF will take longer than the 12-month holding period for gains to come. Only patient investors should apply.
Tactical Trading: Redfin Corp (RDFN)
Meanwhile, short-term traders should consider red fin (RDFN), a company that obtains an “A” rating in the Benefit & Protection system. This suggests that Redfin shares will outperform over the next twelve months.
Investors have many reasons to expect a near-term rally from an upward perspective. Since 2021, shares of this tech-focused real estate brokerage have plummeted from $98 to $8, a number its shareholders would rather forget. This belly flop earns Redfin an “A+” in momentum as a reversal play.
Then there is the market’s perception of Redfin’s business.
Markets have long expected a decline in real estate activity. The Mortgage Bankers Association expects mortgage refinances to grow from $2.3 trillion in 2021 to $730 billion. Home sales will likely fall 6% this year.
But Redfin’s business isn’t based on mortgage refinancing or the number of homes sold (its loss-making mortgage business only exists for the convenience of homebuyers).
Instead, the company’s turnover depends on the total volume of homes traded. Analysts expect that figure to rise 6% to 8% as higher home prices offset a drop in the number of units sold.
Redfin’s costs are relatively fixed. The Company treats its agents as salaried employees rather than commission-based affiliates. This means the business can increase sales without incurring a comparable increase in expenses. Investors should expect earnings surprises to push stocks higher in the coming quarters.
Redfin, however, remains a tactical trade rather than a core Benefit & Protection holding. The company has struggled to turn its tech capabilities into a winning formula – rival Compass Group (COMP) is now four times larger. And Redfin remained deeply unprofitable in 2021 – one of the best years on record for real estate brokers. Its overhead is still too high for a tech company.
Still, the company’s bottoming valuation of 0.37x the price versus futures sales gives it the potential for 3x to 5x returns. While not a stock you want to hold forever, Redfin is a solid game for those looking for quick wins.
Luke Lango Bonus Pick
And finally, Luke Lango is back with information about a tech-based real estate company that beat Zillow (Z) at its own game.
Buying and selling a home is one of the only buying processes in the world that has yet to be digitized and, by extension, streamlined and made hyper-efficient. But now all that is changing… A small, emerging tech company… is pioneering a revolutionary e-commerce platform across the entire US real estate market… And in doing so, will finally take the real estate industry from $1.6 trillion in the digital age – and eventually become the “Amazon of homes”.
Click here to learn more about Luke’s choice.
Why are houses so expensive?
On Tuesday, I noted how the U.S. housing market will likely face a 1950s-style price downturn rather than a 2008 crash. Tight inventory and low debt mean current homeowners are less in demand than in the past. mid 2000s.
I have also noted that house prices are at some of their most unaffordable levels on record.
“A tenant must now be in the top 16% to 21% of income in the United States to meet the typical housing guideline of ‘28% of gross income’.”
These two factors seem to work in opposite directions. Why is housing so expensive when people can’t afford it?
The answer boils down to Cut of houses.
According to the US Census Bureau, the average size of American homes has grown from 1,660 square feet in 1973 to 2,687 square feet today. By some estimates, the average home was just 1,048 square feet in the 1920s.
During this time, construction costs remained stable on an inflation-adjusted price-per-square-foot basis.
According to the American Enterprise Institute, the average price per square foot of new homes sold in the United States has remained close to $116 since 1973.
Attitudes towards big houses are slowly changing. A New York Times article in 2019 noted how many cities are pushing back against laws banning anything other than detached single-family homes. And the migration from high-cost cities to lower-cost cities has accelerated since 2020.
Yet these changes will take time to drive down housing costs. Until then, the United States seems stuck in a stagnant real estate market that is too expensive for new buyers and not growing fast enough for homeowners to take advantage of. Better to stick to stock market investing.
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