What happened

Shares of Redfin (RDFN -0.66%) lost 9.2% on Tuesday after an analyst downgraded the real estate company on valuation concerns. The stock prior to the downgrade was up 100% year to date, leading some to believe it had run up too far, too fast.

RDFN Chart

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So what

It's been a wild year for Redfin, with shares of the online real estate brokerage losing about half of their value during the pandemic-driven sell-off earlier in the year but rallying back in recent months on improving optimism about the economy. The recession that many feared was inevitable in March has still not materialized, and housing sales have not fallen off a cliff.

Redfin shares gained 42% in May alone after posting better-than-expected quarterly results and saying housing demand was holding up well through the lockdown.

Two people shake hands over a model of a house.

Image source: Getty Images.

Susquehanna analyst Jack Micenko has watched the run up in the share price and believes the stock's valuation has gotten ahead of fundamentals. The analyst on Tuesday downgraded Redfin to negative from neutral, saying he's "hard pressed" to find a way to support the current valuation.

Micenko thinks Redfin's success gaining market share can continue, but notes there is a lot of market share gain baked into consensus 2021 estimates. The analyst did raise his price target to $32, up from $24, but that is below the company's current share price even after Wednesday's decline.

Now what

Micenko in his note says he likes Redfin's story and long-term opportunity but concludes even if housing is holding up well, "it's not that good."

As an existing holder of Redfin, I largely agree with him. I like the long-term trends in housing and am bullish on Redfin's opportunity to take a growing share of the market but find it hard to argue that such a dramatic near-term move can be justified by fundamentals.

For short-term holders or those looking to take a profit and invest elsewhere, the downgrade was as good of an excuse as any to sell out of Redfin and invest elsewhere. But for those with a long enough time horizon, there is nothing about the downgrade that suggests it is time to run for the exits.