There is a debate raging on Wall Street about the official status of the stock market. In June 2022, the benchmark S&P 500 index closed 20% below its all-time high, which marked the beginning of a technical bear market. That much was agreed upon, and the market continued to slide until October 2022.
But the index has bounced back this year, and it was recently up more than 20% from that October low point. Bank of America was quick to declare the beginning of a new bull market, but other market professionals contend that the S&P 500 needs to hit a new all-time high before it earns that official status.
But everyday investors shouldn't be worried, because one way or another, history shows the stock market always returns to new highs given enough time. With that said, many stocks are still trading at significant discounts to their best-ever levels, and that might be an opportunity to buy before the next bull market does start (whenever that might be).
Real estate technology company Redfin (RDFN 8.49%) is one of them. It's down 88% from its high set back in 2021 over concerns about rising interest rates and a sluggish housing market. But when the stock market eventually rises to new record levels, it will probably coincide with an improving economy, including an improved housing market.
Here's why now could be a great time to buy Redfin.
Image source: Getty Images.
Redfin is in the middle of an important transition
To say Redfin's business struggled recently would be a drastic understatement. In 2022, the U.S. Federal Reserve embarked on the most aggressive campaign to hike interest rates in its history in order to tame a 40-year high in inflation. That put the brakes on the housing market, which had been hot throughout 2020 and 2021 thanks to near-record-low mortgage rates and waves of pandemic-related government stimulus.
Redfin was forced to close its RedfinNow iBuying segment in late 2022 due to the shifting environment. It involved the company buying homes directly from willing sellers with the intention of flipping them for a profit. But as real estate prices cooled, the company risked losing substantial amounts of money on its property inventory. Direct buying made up more than 50% of Redfin's total revenue, so plugging that hole won't be easy.
Redfin went back to focusing on its highly successful real estate brokering and services segments. In Q2, it had 1,792 lead agents who cover 98% of the U.S. geographic market, but that's down from 2,640 agents in the same quarter last year. The company has trimmed its workforce in an effort to cut costs, which resulted in a small loss of market share. Redfin represented 0.75% of all homes sold across America in Q2, which was down from 0.83% in the year-ago period.
Redfin expects its market share to recover in the second half of 2023 because it's seeing an uptick in its share of online traffic. Plus, it's using new tools like artificial intelligence (AI) to deliver a more efficient search experience for buyers. Redfin now has a plugin for the ChatGPT chatbot, which serves as a virtual assistant to feed users property listings within a specific criteria they set. That should help users avoid spending endless hours scrolling on real estate websites.
Redfin's Q2 earnings beat expectations, but its guidance disappointed
Redfin delivered $275.6 million in revenue during Q2, which was down 21% year over year, but it was within the range of its prior guidance. The company has now excluded iBuying from its prior-year comparisons -- if it was included, the decline in total revenue would have been 54% instead.
But where Redfin did beat expectations was at the bottom line. The company told investors it could lose between $35 million and $44 million in Q2, but it only wound up losing $27.4 million. That loss was 65% smaller compared to the year-ago quarter, which is a testament to Redfin's cost cuts and careful expense management.
The company did disappoint investors with its future guidance, though, and its stock sank 24% following the release of its Q2 report as a result. It had planned to break even on an adjusted EBITDA basis in 2023, but the decline in the housing market has been more pronounced than the company expected. It now expects to achieve that milestone sometime within the next 12 months, which implies it could take until Q2 2024 to get there.
The reason that was such a disappointment is because Redfin's cash balance is dwindling. The company only has around $220 million in cash, equivalents, and short-term investments on its balance sheet, which means there's a risk it might have to raise more capital if it extends its timeline to break even again. That would dilute existing investors, which could push Redfin's stock price down.
Why Redfin stock is a buy ahead of the next bull market
Redfin positioned its business to deliver a healthy balance between growth and profitability once the housing market recovers. It might not happen until next year, which is when some experts predict the Federal Reserve will begin to cut interest rates.
But waiting until then to buy Redfin stock might result in investors paying a much higher price than where it trades today. The company is valued at $1.2 billion as of this writing, and Wall Street analysts predict it will generate $1.14 billion in revenue for the whole of 2023. That means the stock is trading at a price-to-sales (P/S) ratio of around 1, which is a rock-bottom valuation considering it has traded at a P/S ratio of as high as 7.7 in the past.
I would argue that short-term challenges aside, Redfin will emerge from this period as a far better business. It has a genuine shot to be profitable next year, especially with the absence of iBuying, a notoriously tough business in which to make money due to its speculative nature. Brokering and services like mortgages are capital-light, so when the housing market recovers and Redfin's revenue returns to growth, its profitability should accelerate.
With Redfin stock down so steeply from its all-time high, I think the risk-reward proposition makes sense ahead of an economic environment that could be more favorable for the real estate sector next year.
