Unlocking Value Amidst Disruption: A New Perspective on Investing
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Chapter 1: Understanding Value in Investment
The concept of "value" is inherently subjective. While it is commonly associated with stocks that have low multiples, I challenge the conventional institutional perspective. To me, all investing fundamentally revolves around value. When you invest a dollar today, the goal is to see that amount grow over time. It’s crucial to recognize that value and growth are not opposing forces; instead, they should form the foundation of investment strategy.
To achieve a larger return on your investment, you must consider either A) significant undervaluation, B) substantial growth potential, or C) a combination of both. Remember, this is a spectrum of possibilities.
Section 1.1: Case Study - Redfin
An example of a company that defies traditional definitions of value is Redfin (RDFN). This firm operates as a residential real estate brokerage in the United States and Canada, featuring an online marketplace for real estate services. Redfin aids individuals in buying or selling homes, provides title and settlement services, and engages in iBuying—where it purchases and sells homes directly.
Redfin is striving to revolutionize an antiquated industry that has been slow to embrace technological advancements. I believe the costs associated with buying and selling real estate will decline over time, much like the fees for trading securities, which have already become negligible. While it’s difficult to predict when this shift will fully materialize in real estate, I am confident that a downward trend is inevitable. Redfin positions itself advantageously in this potential scenario by employing salaried agents who are not incentivized by commissions and by generating leads through its user-friendly platform (redfin.com).
Section 1.2: Financial Overview
For the fiscal year 2022, Redfin is projecting revenues of $2.5 billion, with positive EBITDA but still negative earnings. This doesn’t align with the conventional view of value investing. However, for those with a longer investment horizon than just a few days, there exists a promising opportunity for future cash flow generation through a business model that addresses the needs of both employees and consumers.
Chapter 2: Valuation Challenges
Valuing companies like Redfin presents a much more complex challenge compared to traditional businesses like Jack in the Box. Historically, Redfin has traded at a Price-to-Sales (P/S) ratio of 3.48 since 2017. Currently, it is trading at a P/S of 1.47, subtly suggesting a potential upside of 100% based on historical valuations, assuming various factors such as growth and interest rates remain stable. While I remain cautious in the short term due to certain obstacles, at a share price of $32, Redfin appears to be significantly undervalued, presenting a considerable growth opportunity in the total addressable market (TAM).
The first video, "Learning's Value in the Era of Disruption," delves into how education and knowledge can be pivotal in navigating disruptive changes in various industries.
The second video, "Turning Every Disruption into an Opportunity," discusses strategies for leveraging disruption to find new opportunities for growth and innovation.