When companies report their financial results each quarter, investors learn new information about the strength of their businesses. That's particularly important right now given how challenging the broader economic climate has been during the last 18 months with high inflation and rising interest rates.
The real estate sector has been one of the biggest casualties. Consumers saw their borrowing power slashed, which crimped demand, so any company reliant on home sales to generate revenue has suffered.
Real estate technology specialist Redfin (RDFN 4.20%) is one of them. It just reported its 2023 first-quarter results, but despite a whopping 45% decline in its revenue, its stock soared 37%. I'll explain why it happened, and why investors might want to buy the stock.
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Redfin is in a major transition
This massive transition is going to result in lower revenue for quite some time. See, Redfin made a key decision to wind down its RedfinNow iBuying business in 2022 when it became clear the real estate market was in for a difficult period.
RedfinNow's model was simple. It would buy homes directly from willing sellers and then attempt to flip them for a profit. That works great when house prices are steadily rising just like they were in 2020 and 2021, but when interest rates move up and demand slows, it throws a wrench in the works. Redfin risked sitting on hundreds of homes in its inventory that would've almost surely declined in value by now, so its decision to wind down the segment was prudent.
The company is now focusing on what it does best. It has a large real estate brokering business, with 1,876 lead agents covering 98% of U.S. geographic markets, which is an unprecedented level of scale. It allows Redfin to charge listing fees as low as 1%, whereas the typical independent broker charges 2.5%. The company says it has saved sellers more than $1 billion in listing fees to date.
Redfin is also focusing on entering new verticals. It generated further traction in its mortgage business in Q1, with 20% of Redfin homebuyers borrowing money from its mortgage division, Bay Equity. That was up from just 4% in the year-ago period. Plus, the company continues to attract more than 50 million visitors per month to its online platforms, where they browse for-sale listings, rental listings, and mortgage options.
Redfin's revenue collapsed in Q1, but it wasn't a surprise
The full value of every home sold under the RedfinNow program was counted as revenue. In Q1 last year, Redfin's total revenue came in at $597.3 million and iBuying accounted for more than 63% of that. Therefore, with that business now winding down, Redfin's most recent Q1 revenue plunged 45% overall.
However, revenue from its service segment (which includes brokering) was down just 2%, which is a more accurate reflection of the company's performance in this difficult housing market.
Where Redfin really improved was on the bottom line. Its net loss came in at $61 million, which was not only a big improvement from the $90 million loss it delivered in Q1 last year, but it was also drastically better than the $116 million it had forecast. That's one of the main reasons investors sent Redfin stock soaring after digesting the report.
The company believes it will generate positive earnings before interest, taxes, depreciation, and amortization (EBITDA) on an adjusted (non-GAAP) basis for the full 2023 year. That would be a noteworthy achievement given the major shift in its business and the soft housing market. According to Redfin's guidance, it might even deliver positive adjusted EBITDA in the second quarter.
Why Redfin stock is a buy now
The 37% pop in Redfin stock on the day following its earnings report takes its year-to-date gain to 125%. For perspective, the Nasdaq-100 technology index is up only 20%. But zooming out, Redfin stock is still down 90% from the all-time high it set in 2021, due to the host of challenges I've mentioned above.
As a result, investors value the company at just $1.05 billion right now. Given its revenue is expected to come in at $1.15 billion this year, that's a price to sales (P/S) ratio of less than 1, which is far below its peak of 7.7.
Put simply, investors are pricing Redfin for near-total failure. But the company has made all of the necessary adjustments to ensure its business not only survives, but will also be leaner and more profitable when the real estate market eventually bounces back. Therefore, this might be an opportunity to buy Redfin stock near a rock-bottom price, keeping the long-term in mind.
