Zillow Group Inc (NYSE:Z) and Redfin Corp (NASDAQ:RDFN) are two pioneers in the online real estate marketplace. D.A. Davidson initiated coverage on both in a report this week. 

The Analyst

Analyst Tom White initiated coverage on Redfin with a Buy rating and $28 price target. He initiated coverage on Zillow with a Neutral rating and $60 price target.

Redfin Disrupts $75B Industry 

Technology has transformed nearly every industry, but real estate has lagged behind due to the intricacies of the transaction and the lack of transparency between agents, sellers and buyers. 

Several startups are looking to change the current model with flat rate pricing, an initiative that Redfin recently launched: a 1-percent listing fee available in 26 markets that White finds encouraging. 

“We expect the competitively compelling value prop and simplicity of the '1 percent' product to resonate with consumers this year and potentially accelerate RDFN share gains,” the analyst said. 

Redfin is an attractive way to play the disruption of the $75-billion brokerage industry, White said. Redfin offers a compelling value proposition by utilizing technology to streamline the selling process and pass savings on to consumers, he said. Redfin homebuyers save an average of $2,700 per transaction, according to D.A. Davidson. 

Redfin has more than 1,100 lead agents who are W-2 employees of the company and made nearly twice as much in 2017 as their brokerage competitors, White said. Redfin agents use proprietary tools to create a feedback loop between software developers and operations, a key differentiator from traditional brokerage competition, the analyst said.

The company has plenty of room to grow, with just 0.71 percent of the U.S. market share of total home values, up from 0.56 percent last year, according to D.A. Davidson. 

Zillow Well-Positioned In Real Estate's Digital Shift

Zillow is the original real estate disruptor, but with shares up nearly 65 percent over the past 12 months, White said the positives are sufficiently priced into the stock.

“ZG is a pioneer in using technology to bring increased transparency and more efficient/accountable marketing solutions to the real estate industry. Brokerages are now experiencing the follow-on effects of Zillow’s original disruption, with new tech-enabled brokerages gaining market share by providing lower fees and better experiences for consumers/agents,” White said.

This raises some competitive questions for the first time since Zillow purchased Trulia, but White said Zillow’s brokerage-agnostic media model is well-positioned to benefit as real estate continues to shift to digital channels.

“Zillow’s audience leadership of the category remains dominant, and management looks set to remain ahead of the evolving consumer expectations in real estate thanks to a series of recent innovations and a robust product development pipeline." 

Price Action

Zillow and Redfin shares were trading relatively flat on Wednesday. At last check, Redfin was down 0.04 percent and Zillow was up 0.09 percent. 

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