More than a decade removed from the financial crisis of 2008-09, a steady housing market got a shot of rocket fuel in the wake of initial pandemic lockdowns last spring. Confined to home and presented with new opportunities to relocate thanks to remote work, Americans went house shopping -- but were presented with a short supply of existing homes to choose from. What has ensued in the last year is a sharp rise in home values, bidding wars on properties, and a white-hot U.S. housing market that has put lots of cash in some home sellers' pockets.
Signs abound that things are cooling off, though, including from data presented by tech-enhanced real estate brokerage firm Redfin (RDFN +0.00%). In fact, shares are down 31% year to date as of this writing after an epic 225% gain in 2020. Is Redfin stock a buy?
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The case against Redfin
According to national real estate statistics, new supply of homes (driven by sellers being coaxed into the market because of a sharp rise in average home price) is beginning to level off, as are actual home sales. Redfin reported the number of home purchases made with cash reached 30% during the first four months of 2021, the highest level since 2014 when the median national home price was still shy of $300,000. According to the Federal Reserve Bank of St. Louis, the median selling price was $375,000 during the second quarter of 2021, up 23% from five years ago.
However, Redfin has been reporting fewer bidding wars and more homeselling price reductions this summer as life during the pandemic has slowly normalized. Since Redfin is itself a real estate broker -- albeit one that charges far less in commission than a traditional brokerage firm -- a slowdown or drop in home prices could lead to less revenue growth.
The real estate industry has also been experiencing quite a bit of agent attrition as of late. On the Q2 2021 earnings call, CEO Glenn Kelman said 49% of Redfin's newer agents left the company on an annualized basis. With more U.S.-based agents in the business than there are actual home listings, suffice to say the market for homebuyer and seller representatives will need to level out. Kelman said one in five that left the company plan to exit the real estate industry entirely.
Such a high rate of attrition could dampen Redfin's ability to continue scooping up market share, one of the key metrics the company provides every quarter. Paired with a possible cool-off in home buying and selling, Redfin's reported 121% year-over-year increase in revenue in Q2 2021 (or up 100% when excluding the $43 million brought in by the recently acquired RentPath) could be due for a reality check.
The real reason you might buy Redfin
Redfin is taking steps to mitigate these issues, though, including a ramp-up in marketing to increase awareness of the company's services among consumers. This has yielded higher home supply on the site, a key driving force in boosting its U.S. existing home sales market share. On that front, Redfin is still doing quite well. Redfin commanded 1.18% of U.S. home sales by value in Q2 2021, up from 1.14% in Q1 and 0.94% in Q2 2020.
This helps illustrate why this real estate tech firm isn't a story completely reliant on a hot housing market. On the contrary; this is a story of expanding share of the broader real estate industry -- and not just in existing U.S. home sales. As Kelman explained on the earnings call:
Parts of Redfin that have been in a defensive crouch can now go on the attack. Every major property technology company is scrambling to build the complete real estate solution that Redfin envisioned years ago: Online listing search, a brokerage, an iBuyer, a national home-renovator, a lender, and a title company. As Redfin addresses, one by one, the challenges created by rapid growth, we can combine these services in new ways to make moving from home to home profoundly better. This is why we believe we can build a company an order of magnitude larger than the one we have today.
Indeed, Redfin has built an enviable technology stack spanning multiple needs of homeowners and (now thanks to the RentPath takeover) renters. And this is still a tiny business. After the most recent tumble in share price, the company's market cap sits at just shy of $5 billion. Company losses may not sit well with all investors. Net loss was $29.8 million in Q2, although that amount includes noncash expenses like $13.7 million in employee stock-based compensation and $13.8 million in depreciation and amortization. But all said, Redfin can afford to continue spending to promote growth. It had unrestricted cash and investments of $801 million as of the end of June 2021 (offset by convertible debt of $1.24 billion).
Redfin hardly could be considered cheap given the possible headwinds to its rapid growth that are starting to crop up, but Redfin still looks like a long-term value at just four times trailing 12-month revenue as of this writing. If you think the company can continue to gain market share of the massive and massively complex homebuying and renting industry, now looks like a good time to buy.
