Shares of online real estate broker Redfin (RDFN -1.96%) soared higher on Friday. Shares rose about 3.5% as investors digested the company's first-quarter earnings release. A beat on both the top and bottom line for the period had investors looking up.
Of course, shares of the stock are still down an incredible 80% over the 12 months and more than 65% in 2022 alone. So even though a 10% gain is nice, many Redfin shareholders are likely still deep into the red. Could the stock's gain on Friday be the beginning of a broader rebound? Or are there still some concerns that make the stock risky?
Where Redfin beat expectations
Redfin's first-quarter revenue skyrocketed 123% year over year to $597.3 million, beating analysts' average forecast for revenue of $551 million. Further, the company's adjusted loss per share of $0.86 was also better than analysts' average forecast for a loss per share of $1.09.
"Redfin exceeded our first-quarter revenues and earnings guidance by tens of millions of dollars," said Redfin CEO Glenn Kelman in the company's first-quarter earnings release. "Online traffic accelerated significantly. Our core business gained share, and we expect those gains to accelerate throughout the year."
Several concerns to note
For the most part, therefore, there's a lot for Redfin investors to be excited about. But investors should consider two other negative factors as well.
First, the company's core real estate services business, which is its profit center, grew revenue only 5% year over year. As CEO Kelman noted in the company's first-quarter earnings call, the core segment subsidized all of its other businesses last year. Sure, the other segments may generate gross profit, but only its real estate services business is regularly generating pre-tex net income (profits after all program costs, including sales, general, and administrative expenses and cost of revenue).
It's no wonder that Redfin's adjusted loss per share of $0.86 was worse than a loss of $0.37 in the year-ago period. A paltry 5% growth from real estate services wasn't enough to offset the losses incurred from Redfin's other businesses. And this highlights the second key concern: Redfin continues to report losses, despite benefiting from surreal triple-digit growth in its properties business.
But investors should note that Kelman did provide some promising news in Redfin's first-quarter earnings call. He said that its mortgage and properties segments are now trending to be approximately break-even -- or possibly even profitable -- for the full year. "A company that once planned to make money in the distant future will generate cash from operations this year, and net income in 2024," Kelman added.
In addition, investors should note that Redfin's disruptive approaches in the real estate industry continue to lead to market share gains and growing brand awareness. Today, Redfin boasts about 1.2% market share of quarterly existing U.S. home sales, up from about 1% at the end of 2020. A case can be made that the company's aggressive efforts to reinvest in its business as it scales are worth the market share gains. Once the company crosses key profitability thresholds thanks to ecomies of scale, the higher volume from a larger market share could translate to substantial profits.
Altogether, there're still some substantial risks to owning Redfin shares. But the stock's big decline over the past year has likely priced in most of those risks. Further, with the company likely to generate positive cash from operations this year and net income by 2024, it does seem likely that Redfin stock could continue rebounding some over the next 12 months. Of course, there are no guarantees this happens. But shares are certainly looking more attractive following the additional commentary Redfin provided investors about its profitability expectations.