Real estate tech stocks have gotten hit hard this year, perhaps none more so than Redfin (RDFN 0.93%). Shares of the online real estate brokerage plunged 79% through the first half of the year, according to data from S&P Global Market Intelligence, as the pandemic-fueled boom in the housing market has rapidly disappeared. Mortgage rates have jumped and prices have gotten out of reach for millions of prospective home-buyers. At the same time, the reopening of the economy means that pandemic-related demands for things like more space, a yard, and a home office have faded.
As you can see from the chart below, the stock has fallen steadily throughout the first six months of 2022, dropping sharply in February on its earnings report. Later in the year, Redfin also announced that it was laying off 8% of its workforce.
The economic landscape has been challenging for all real estate tech stocks, including Zillow and Opendoor, and the whole sector has seen valuations plunge this year as investors have become more skeptical of unprofitable growth stocks .
Naturally, a weakening housing market is bad news for Redfin, which makes most of its money on sales commissions, but also flips houses and operates a rental business powered by RentPath.
The first clear sign of trouble came when the stock dropped 20% on Feb. 18 after Redfin reported fourth-quarter earnings. Though the company actually beat analyst estimates, in a rising-interest rate environment investors seemed concerned about the company's wide losses and sent the stock lower accordingly. It lost $27 million, or $0.27 a share, on $643.1 million in revenue, and Redfin expected losses continuing in 2022, forecasting a net loss of $115 million to $122 million.
In May, the stock briefly gained on its first-quarter report as it again beat analyst estimates. However, the company said it gained just 2 basis points in market share over the last year, showing its growth is slowing down. For the second quarter, it called for revenue of $613 million to $650 million, or growth of 30% to 38%, below estimates of $684.8 million, as the company is scaling back its home-flipping business as the housing market softens.
Finally, the layoffs in June confirmed investor fears that the company has come up against stiff headwinds as the housing market shifts.
Redfin's potential as a real estate disruptor still seems intact, and the stock is trading at a forward price-to-sales ratio of just 0.4, though much of that revenue has come from the low-margin properties segment, or what it calls its home-flipping business.
The stock will likely be down until the housing market turns around. In the meantime, investors should look for the company to show some progress toward consistent profitability; that will also be necessary to win investors over.