Redfin (RDFN 8.49%) peaked at more than 14 times its current stock price in 2021, and it isn't hard to see why investor sentiment has soured. At that time, the U.S. real estate market was on fire. Home prices had started to rise rapidly but interest rates were still near all-time lows, keeping market activity elevated. The stock market was soaring and low-cost capital was abundant. Plus, investors had high hopes that the Redfin Now iBuying business was going to be a massive growth driver.
What went wrong?
Fast-forward to the present time, and things look very different. Real estate prices have mostly stabilized, but mortgage rates are roughly double what they were at Redfin's peak, which has caused existing home inventories and buyer activity to grind to a near-halt in many markets. The company has been losing money at an alarming pace, and decided to shut down Redfin Now, which was responsible for much of it.
Plus, Redfin went on somewhat of an acquisition spree, acquiring RentPath out of bankruptcy for $608 million and mortgage lender Bay Equity Home Loans for about $138 million. To put these numbers in perspective, these acquisition prices are roughly equal to the company's entire current market cap. In retrospect, it's tough to justify these, especially with the mortgage market operating at a fraction of the volume of a couple years ago.
As of this writing, Redfin trades for 93% less than its all-time high, and that's after more than doubling from its late 2022 lows.
Why I bought Redfin and don't plan to sell
Despite the terrible stock performance, I think this could be an opportunity for patient (and risk-tolerant) investors to add shares of this real estate innovator. In fact. I started building a position in Redfin in late 2022 and have added to it several times in the months since.
For one thing, Redfin is making the right moves in a difficult situation. It made the tough decision to complete several rounds of layoffs, shut down Redfin Now, and decided to focus on its core real estate services businesses.
The brokerage business is the heart of the company and provides a tech-focused solution for buyers and sellers. And while there are other brokers that use a tech-heavy approach, such as EXP World Holdings (EXPI 1.50%), Redfin is the only one that aims to disrupt the antiquated commission structure by charging sellers half of the traditional 3% selling fee. Since 2017, Redfin has grown its share of existing U.S. home sales from 0.42% to 0.8%, but there is still plenty of room to grow.
Furthermore, Redfin's RentPath acquisition could still prove to be a major asset. The deal came with several major brands, such as ApartmentGuide.com, which not only creates a new market opportunity, but gets renters who will eventually want to buy a home into Redfin's ecosystem. And while the investment in its mortgage business might look like an ill-timed move (and it was), it is setting the company up for tremendous cross-selling potential if and when the housing market improves.
Can Redfin rebound?
To be clear, it's not likely that Redfin is going to reach a new all-time high anytime soon. That would require a roughly 14x move from the current level.
However, there's room for the core brokerage business to multiply in size several times over the coming years, and as the real estate market rebounds, there's potential for serious revenue growth. Redfin's management thinks the company will be profitable in 2024, and if it can achieve this through a combination of growth and cost reductions, it could be a major positive catalyst for the stock.
