Redfin (NASDAQ:RDFN) reported third-quarter results on Nov. 8. The discount real estate brokerage delivered sharply higher sales, but also warned that weakening trends in the overall housing market could cause growth to slow in the coming quarters.

Redfin results: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$140.26 million

$109.48 million

28%

Operating income

$3.29 million

$10.25 million

(68%)

Adjusted EPS

$0.04

$0.12

(67%)

Data source: Redfin Q3 2018 earnings release. EPS = earnings per share.

What happened with Redfin this quarter?

Redfin's share of U.S. existing home sales rose 14 basis points year over year, to 0.85%. CEO Glenn Kelman said these gains reflect the "enduring appeal" of Redfin's low prices and personalized service.

"From the third quarter of 2017 to the third quarter of 2018, visitors to our website and mobile applications grew 19%, a slight acceleration from the second quarter's 18% year-over-year growth," Kelman said during a conference call with analysts. "Machine learning software personalized our site in new ways for each online visitor, leading to even faster growth in repeat visits and in the number of homebuyers contacting our agents for service." 

However, a slowdown in the real estate market and higher mortgage rates are making closing on sales more challenging.

"In our last call we said that the market was weaker than most analysts realize, especially in high-priced coastal cities," Kelman said. "Since then, rising rates and high home prices have caused buyers to become cautious industrywide, a trend that we believe will continue, if not strengthen, at least through November." 

Nevertheless, Redfin was able to increase its revenue by 28%, to $140.3 million, in the third quarter.

"A housing-market correction always makes it harder to grow revenues, but our ability to do so in even challenging markets speaks to our business's fundamental strength," Kelman said. "We believe that our improved third-quarter growth in traffic, as well as increased engagement levels between agents and customers, sets us up for continued share growth." 

Yet the spending required to fuel this growth is taking a toll on profits. Gross margin declined 6 percentage points to 30%, and operating margin fell 7 percentage points to 2.3%. Kelman, though, is confident that these investments will continue to bear fruit and position the company for long-term success.

"Our investments in software to make our agents more efficient -- and to integrate all the paperwork and processes for buying and selling a home, getting a mortgage and transferring the title -- should let us compete at a price and a scale few other brokerages can," Kelman said in the earnings press release.

A series of increasingly larger model houses

Redfin expects to rapidly scale its business in the coming years. Image source: Getty Images.

Looking forward

For the fourth quarter, Redfin expects revenue to rise 20%-24%, to between $115.1 million and $118.3 million. The company also expects to generate a net loss of $16.6 million to $18.7 million, compared to a net loss of $1.8 million in the fourth quarter of 2017.

Looking even further ahead, Kelman laid out a vision in which Redfin disrupts the multitrillion-dollar housing market, capturing a far larger share in the process: 

We're building our own loan origination system and planning over the next five years to reinvent how quickly and easily people can move from one home to another. This process now takes consumers six months and often cost them nearly 6% of their nest egg, but it should take six weeks, and when it does, people will be far less reluctant to move to find better opportunities and a better life.

Few real estate companies have embraced this entire problem with a website, a brokerage, and businesses for mortgages, title, and instant offers. And while the magnitude of this opportunity has created financial and operational strengths for Redfin today, it will over time let us compete at a level no other company can.

If Redfin is able to execute its long-term strategy, shareholders are likely to be well rewarded in the years ahead.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool recommends Redfin. The Motley Fool has a disclosure policy.