Summary
- Fathom Holdings is a small player in the online real estate market dominated by firms like Zillow and Redfin.
- Real estate agents love the Fathom platform and they have been growing their agent count every year and now have over 5,000 on their platform.
- Pandemic-induced changes to real estate agencies and markets have played directly into Fathom's always virtual approach to the market.
- They have slim gross margins but recently crossed over into profitability. With $30M in fresh capital and historically high returns on new investments, they may accelerate their growth from here.
- Our valuation work suggests that even at a 50% discount to more established players the shares could reach $33, which is a double from current levels.
Online Real Estate Transactions
If you haven’t noticed there is a boom going on in real estate. Part of it is COVID, part of it is low rates, part of it is the expectation of being able to do everything online. People are buying and selling homes online, in some cases with no physical visit. Market leader Zillow (Z) is hitting new highs at a $19B market cap at nearly 5x sales. Even smaller rival Redfin (RDFN) has surged to new all-time highs.
In a fairly large survey done by Redfin, they found that a much larger percentage of buyers (45%) were putting in offers on homes that they didn’t physically visit. Instead, they relied on photos, videos, and sometimes virtual tours using Zoom (NASDAQ:ZM) or FaceTime (AAPL). The same survey shows an increase in competitive situations where there are multiple bidders for the same property. How durable this strong real estate market will be is unknown but buyers and sellers may get used to the kind of speed and increased efficiency that these online methods offer – especially for similar properties in subdivisions and condominiums.
One small and curious name that came public recently is Fathom Holdings (FTHM) which did a small deal with a lone underwriter (Roth), which was easy to overlook. But we are living in a special time. The name is more interesting than we expected.
These guys have created a platform that agents prefer and may yet create the best consumer experience as well. If they succeed the current ~$240M market cap will grow considerably.
Fathom is trying to use the “disruptor” model in this market which has been tried before. Real estate is a market that resists innovation and the agencies are like investment banks, try and do business without them at your peril.
The Fathom story can be encapsulated like this – it’s an online platform for real estate agents and instead of charging a percentage it’s a fixed fee that starts at $450 and drops to $99 if they sell enough properties. The pitch to agents is simple – you get to keep more of what you sell. On top of that, they also grant agents some stock for sales and referrals which agents see as a great way to save for retirement, children, or whatever. You get more control over your enterprise and you get to keep more of the money.
One of the biggest “cons” cited about Fathom was their “lack of physical offices” which now seems quaint. It also casts the significant “cut” that agencies take in part for their “infrastructure” in a less favorable light.
It’s about the *agent* not the agency.
Now the best properties in the best areas are still going to be controlled by the agencies. This is at least the case today. Homeowners want the “best” when they sell their main asset. They want the kind of service and support of an agent that often prefers to work under the comfort of an agency umbrella.
