Please ensure Javascript is enabled for purposes of website accessibility

Should You Buy New IPO Redfin Stock? 4 Analysts Vote "No"

By Rich Smith - Aug 22, 2017 at 11:10AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

And these are the analysts who like Redfin.

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

[if !supportAnnotations]


Pity the folks who bought into Redfin's (RDFN -5.64%) IPO. Wall Street sold them the stock, and it did quite well initially -- but now, Wall Street wants no part of it.

Online real estate broker Redfin held its IPO late last month, and the stock quickly popped 45% in its first day of trading. Priced at $15 a share, Redfin stock closed out its IPO day at $21.72 and has proceeded to climb a further 27% in the days since. Already, Redfin is nearly a two-bagger since its IPO less than a month ago. But if you ask the folks who helped underwrite the IPO what they think of Redfin today, you'll be hard-pressed to find any fans -- or anybody at all, really, who expects Redfin to keep going up.

For sale sign in front of house

Redfin stock could soon go on sale. That's not great news for those who bought after the IPO. Image source: Getty Images.

Who backed the Redfin IPO in July?

Redfin hit the markets with underwriting from six big Wall Street firms: Goldman Sachs, which underwrote 3.7 million of the company's shares, Allen & Co. (1.8 million shares), Merrill Lynch and RBC Capital (1.4 million each), and Oppenheimer and Stifel Nicolaus (461,550 share apiece).

Who still likes Redfin today?

This morning, reports that five of these six firms have initiated coverage of Redfin stock. The good news is that Oppenheimer (one of the smaller backers) remains optimistic about the stock, initiating coverage with an "outperform" rating (i.e., "buy") and a $31 price target.

The bad news is that the other four firms that have chimed in...don't necessarily like Redfin at its "new and improved" price.

The bankers who no longer love Redfin

The list of analysts who have turned cold on Redfin is a whole lot longer than the list of Redfin stock's fans:

  • RBC Capital: The real estate market is "ripe for disruption," and Redfin offers "robust fundamentals," says RBC. Furthermore, this analyst thinks Redfin still has a bit farther to run -- maybe $28 per share over the next 12 months. Nevertheless, the most RBC can bring itself to give Redfin is a sector perform rating -- i.e., neutral.
  • Stifel Nicolaus: Similar to RBC, Stifel believes Redfin will "disrupt the real estate sector." Nevertheless, at a share price nearly twice what it cost less than a month ago, Stifel sees Redfin shares as "fairly valued" -- and indeed, predicts they may even fall a bit, to $24 per share within a year.
  • Merrill Lynch: Mimicking RBC's $28 price target, Merrill's comments indicate that Redfin stock's near-double in price may be a bit premature. The company will need "time to alter the landscape" of the real estate market, warns Merrill. If Redfin posts "accelerated growth," that will be evidence that the company's business model of keeping sales agents in house (as opposed to Zillow's (Z -2.19%) practice of partnering with outside real estate agents) is working. On the other hand, if sales growth slows...
  • Goldman Sachs: Probably most disheartening to Redfin shareholders is the fact that the IPO's biggest backer, Goldman Sachs, now says it's actually not that positive on Redfin's business model of "reliance on [salaried] brokerage agents." Furthermore, Redfin's bargain-basement commissions, while they've been bringing customers in the door, "could dampen the pace of growth and profitability" relative to someone like Zillow. Accordingly, Goldman Sachs now rates Redfin stock as neutral. Worse, Goldman thinks the stock is worth only about $20 -- less than it sold for at the end of IPO day, and much less than what the stock costs today.

What it means to investors

Unsurprisingly, investors are not taking these revelations well today. It probably doesn't help, either, that even the analysts who are less negative than Goldman on Redfin aren't exactly consistent in their logic for defending the stock.

For example, RBC, which urged investors to buy Redfin one month ago and still sees the stock going to $28 in the near term, said in its note today that Redfin stock would be "reasonably valued [at] 5X P/S." The problem is, five times Redfin's $285 million in trailing sales implies a "reasonable value" of $1.4 billion for Redfin as a whole -- but Redfin stock currently has a market capitalization of $2.2 billion.

Simple math tells you that this implies Redfin stock is close to 60% overvalued today, yet RBC is predicting the stock will not fall, but rise another 5% from today's price.

Meanwhile, Redfin stock remains unprofitable ($26 million lost over the past 12 months) and cash-flow negative ($29 million in negative operating cash flow), and even its rate of sales growth may be slowing. From 50% annualized sales growth in 2015, Redfin dropped to 43% last year, and 44% last quarter.

Long story short: Wall Street's sudden lack of enthusiasm for the stock it pushed so hard last month may be disappointing, but it's not necessarily wrong.

David Gardner owns shares of Zillow Group (C shares). Rich Smith has no position in any of the stocks mentioned. Tom Gardner owns shares of Zillow Group (C shares). The Motley Fool owns shares of and recommends Zillow Group (C shares). The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Redfin Corporation Stock Quote
Redfin Corporation
$12.04 (-5.64%) $0.72
Zillow Group, Inc. Stock Quote
Zillow Group, Inc.
$38.76 (-2.19%) $0.87

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.