Real estate tech company Redfin (RDFN -0.13%) has taken quite the beating, falling 76% over the past year. Today's market volatility and the recent tech market crash have put its share price on a serious sale, but does today's discount make Redfin a buy? Here's a closer look.
Growing business yet growing losses
Redfin is a full-service listing platform that offers a suite of services to help buyers and sellers in the home buying or sale process. In addition to allowing people to search or list a home for sale, its site can also connect customers with a Redfin agent who charges lower fees than a traditional Realtor, get a home loan or close on a property through its title or mortgage services, or get an instant offer to purchase a home through its iBuying arm, Redfin Now.
Business is picking up for the company as it expands its market presence and gains popularity among users. In 2021 it had 44.7 million average monthly users to the site, a 10% increase from 2020, while helping save homebuyers and sellers $288 million in commissions from its lowered agent fee structure. Its iBuying business is now in 30 markets, and 2021 marked the first positive gross profit for Redfin Now since its inception, earning $10 million. In the fourth quarter of 2021, Redfin accounted for 1.15% of all existing homes for sale by value.
2021 was a record year for the housing market. Home prices increased 18.5% on average across the nation. Higher sales prices, coupled with a larger market share of homes being bought or sold through Redfin and its acquisition of RentPath, helped the company increase its revenues by 117% year over year. Yet despite this, the company is still operating at a net loss of $109 million.
This loss is largely due to a greater number of liabilities and higher associated costs for its product and services. Its gross margin has declined year over year, now sitting at 21%. Ideally, gross margin would increase as its revenues grow, meaning the company is becoming more profitable and leaving less room for concern in a market pullback, but that's not the case. Its iBuying program, which is most at risk in the event of the market cooling, something we're already seeing signs of, has a gross margin of just 1.2%, meaning there is very little room for error before its profit becomes a loss.
The path forward
The company announced the launch of its rental search in March 2022, which is piggybacking on the late acquisition of RentPath, which owns ApartmentGuide.com, Rentals.com, and Rent.com, and should bring a new revenue stream to the company while also competing with similar services offered by real estate listing giant Zillow. But it's hardly enough to compensate for the losses the company is enduring.
It's not uncommon for tech companies to operate at a loss before business really takes off. But it's clear shareholder concern is growing. If the market cools, demand for home sales and purchasing, as well as things like mortgages and closings, could falter, hurting the company's revenues. If values decline, the inventory of homes on its books could be worth less than anticipated leaving Redfin with an even greater loss.
In the long term, there's still a lot of room to grow. A jump in market share from 1.15% to even 3% would mean tremendous growth for the company and its shareholders -- something that could be achieved in the next five to 10 years, making today's discount a value buy. But investors need to remember it could be a bumpy ride on its path forward and several more years of net losses before it finally reaches consistent profitability.