By providing its agents with a technology platform, Redfin (RDFN 8.49%) has found success in the competitive real estate brokerage industry. It has a presence in more than 100 markets in the U.S. and Canada, and it's the most visited brokerage website.
But the shares have performed poorly, and they are currently 93% below their peak price (as of Nov. 28). This is due to unfavorable macro headwinds. Maybe value-focused investors will find the beaten-down price-to-sales ratio of about 0.35 as an attractive opportunity that can't be passed up.
So, is this tech-focused real estate stock a smart buy right now? Here's what investors need to know about Redfin.
Signs of hope
Since Redfin reported its third-quarter financial results on Nov. 2, the shares are up more than 38%. Clearly, Wall Street is becoming more optimistic about the company's prospects. That might be because inflation is showing signs of cooling, while at the same time, the average 30-year fixed-rate mortgage is coming down from a recent peak in late October.
Revenue during the three-month period came in at $269 million, which represented a 12% year-over-year decline. Weaker demand for home sales deserves the blame here. However, in Q4, management only expects sales to drop by 5%.
It's also encouraging to see that Redfin's market share (of existing home sales measured in units) jumped from 0.75% just three months ago to 0.78% now.
Moving down the income statement, the business posted a net loss of $19 million. This figure was substantially less than the net loss of $90 million in the year-ago period. The improvement is partly due to the disposal of RedfinNow about a year ago. This was the company's home-flipping segment, which was registering huge losses last year amid rising interest rates. The leadership team can now fully focus on brokerage services.
Chris Nielsen, the chief financial officer, provided an upbeat tone during the Q3 2023 earnings call:
"We believe our Q3 results and Q4 outlook demonstrate our ability to manage the business along the path to profitability in spite of the challenging market," he said. "And we believe improvements we're making to enhance both profitability and resilience will benefit the business for years to come."
Negative attributes
To its credit, Redfin has developed a successful tech real estate platform. And this enables it to charge lower commissions, at 1%, compared to the industry average of about 3%. Plus, customers gain by benefiting from higher selling prices using Redfin.
But despite the attractive customer-value proposition, there are just some factors that make me hesitant to add the stock to my portfolio.
For starters, Redfin cannot escape the realities of the broader macro environment. It's like swimming against the tide. No matter how innovative Redfin is and how much money it can save homeowners, the Federal Reserve's interest rate increases to damp inflation have a critical impact on the company's performance.
As a result, Redfin has proven to be a cyclical business. The ebbs and flows of the housing market and mortgage rates will always dictate the company's financial performance.
Investors who still like Redfin can aim to buy shares right before the economic cycle and housing market start to pick up steam. The hope is that lower interest rates and strong demand will lead to outstanding financial results. That sounds like a smart plan, but trying to time the market is almost impossible to do successfully in a consistent manner.
And the fact that the company isn't yet profitable worries me. Yes, Redfin is taking steps in the right direction by reining in its net losses. However, I need to see consistent profits to feel comfortable as a prospective investor.
Even though the valuation is ridiculously cheap, I think it's a good idea to pass on buying Redfin stock right now.
