Let's be clear: Any stock that loses 89% of its value from its all-time high carries inherent risks. But technology-driven real estate company Redfin (RDFN -5.33%) continues to deliver powerful growth even in the face of tightening economic conditions.
As is the case with many tech stocks, Redfin's decline is partly attributable to the plunge in the Nasdaq-100 index, which is now in a bear market, having lost 28.3% of its value. It has been a drag on investor sentiment, and there's no bottom in sight just yet.
That's one of a few headwinds Redfin faces going forward, with the largest being a further rise in interest rates, which could slow demand for home buying in the near term. But real estate is a historically strong asset class, and investors who have a five- to 10-year time horizon could do incredibly well buying this stock at a discount right now.
A one-stop-shop for all things real estate
Selling a home is no simple process, which is why most people engage the expertise of a professional real estate broker and are willing to pay a listing fee as high as 2.5% of the sale price. Most brokers work within small agencies and build a market presence in one specific geographic location, and while this has many benefits, it caps growth potential and makes it hard to create a scalable business.
That's where Redfin is different. It has a nationwide presence across the U.S. with 2,750 employed brokers, allowing it to significantly undercut independent agencies on price. Redfin typically charges listing fees of between 1% and 1.5%, and the company says it has saved consumers over $1 billion since inception -- $59 million of which was saved in first-quarter 2022 alone. It's a win-win for Redfin and for sellers, and it has sent the company's market share soaring to represent 1.18% of all homes sold across America in the quarter (by value).
But Redfin wants to handle more of the real estate journey for its customers. It has a growing iBuying segment where it purchases homes directly from sellers with the intention of flipping them for a profit. It's a volatile business model that resulted in major losses for key competitor Zillow Group (Z -3.55%) (ZG -3.44%), and conversely, big profits for the smaller Offerpad Solutions (OPAD -1.85%). Redfin has so far operated right in the middle, breaking even in 2021 and generating a small gross profit in Q1 2022.
The company has also aggressively expanded into rentals through its 2021 acquisition of RentPath, the parent company of Rent.com, Rentals.com, and ApartmentGuide.com. And on April 1 this year, Redfin bought Bay Equity Home Loans to accelerate its entry into the mortgage business.
Soaring growth in challenging circumstances
The U.S. economic landscape is in the midst of a seismic shift. After two years of record levels of government stimulus combined with low interest rates to stave off a pandemic-driven economic downturn, the Federal Reserve is now on the path to normalizing monetary policy. It lifted the benchmark rate by 0.5% in its recent May meeting, twice the pace of a typical 0.25% increase, and it expects there's more to come.
That will undoubtedly dampen house prices because it'll be far more expensive for prospective buyers to borrow money.
In Q1 2022, Redfin experienced a 123% surge in revenue to $579 million, which could be the result of a last-ditch attempt by buyers to enter the real estate market before interest rates go much higher. But it was also attributable to operational feats such as Redfin's steadily increasing U.S. market share, and the fact that it sold a record-high number of homes under its iBuying business during the quarter.
While the real estate market could very well soften in the remainder of 2022, analysts still think Redfin could generate a company-record $2.55 billion in revenue for the year, which would be a 32% jump compared to 2021.
Why Redfin is a buy now
Redfin does have one important internal challenge: Profitability. The company lost $116.8 million in 2021 and a further $91.5 million in the first quarter of 2022 alone. The recent loss was due to larger investments in the company's technology development and marketing.
But this expenditure is geared toward further growth, and when Redfin eventually achieves a greater level of scale, profits should flow organically. The company has over $740 million in cash and short-term investments on its balance sheet, which offers some breathing room, as part of a broader $1.8 billion in assets.
Since Redfin stock has a market valuation of just $1.1 billion right now, it's trading well below that asset value, not to mention less than 0.5 times estimated 2022 sales. By comparison, competitor Zillow Group trades at a forward price to sales multiple of 1.7 -- over three times higher than Redfin -- despite that company shuttering its iBuying business, which was one of its largest revenue segments.
It's clear the market is heavily pessimistic on Redfin stock right now given that it has declined 89% from its all-time high, but that might be an opportunity for those with a long-term investment horizon. After all, sentiment in the real estate sector, and the broader economy, will eventually improve.