Between March 2022 and August 2023, the U.S. Federal Reserve raised interest rates from a historic low of 0.25%, all the way to 5.50%. The goal was to tame inflation, which reached a 40-year high of 8% in 2022 and threatened to derail the economy.
The Consumer Price Index (CPI) measure of inflation ended 2023 at 4.1%, and while that's still higher than the Fed's target of 2%, it's trending in the right direction. As a result, the Fed is forecasting three interest rate cuts this year.
Changes in interest rates significantly impact household budgets, which means they also affect industries sensitive to consumer spending like real estate and e-commerce. So with interest rates expected to fall soon, here's why investors with a spare $70 might want to buy one share of Redfin (RDFN +0.00%) and one share of Sea Limited (SE +0.54%).
NASDAQ: RDFN
Key Data Points
1. Redfin: Real estate brokering at scale
In October of last year, U.S. existing home sales fell to a seasonally adjusted annualized rate of 3.79 million units, which was the lowest level in 13 years. They have since ticked higher and most recently came in at 4.38 million units in February, but that's still below the 10-year average of around 5 million. In other words, this isn't a great time to be a real estate broker.
That's one reason Redfin stock has plunged 93% from its all-time high. Another reason is the closure of its iBuying (direct buying) business in 2022, which accounted for nearly half the company's revenue. Direct buying involves companies purchasing homes directly from willing sellers and attempting to flip them for a quick profit. It's a lucrative practice when real estate prices rise, but it can lead to catastrophic losses in a sluggish market.
Redfin is now focusing on its portfolio of real estate services, which includes brokering. It employs 1,692 lead agents who cover 98% of U.S. markets by population, and that scale allows the company to charge listing fees as low as 1%, undercutting the industry standard of 2.5%.
Redfin represented 0.76% of all homes sold across the country last year, which is an impressive market share considering there are more than 2 million licensed agents in the industry. That volume allows Redfin to cross-sell some of its other products really effectively. For example, 25% of people who bought a home through Redfin in the fourth quarter of 2023 (and required financing) used Redfin for their mortgage. That attach-rate represented an all-time high.
Redfin's services revenue (which excludes the shuttered iBuying segment) came in at $976 million in 2023, which was an 11% drop from 2022 on the back of high interest rates and sluggish home sales. The company also lost $130 million on the bottom line, though it was a 59% reduction from its year-ago net loss.
But Wall Street thinks Redfin's revenue will top $1 billion in 2024, representing modest growth of 6.8%. The company also told investors it plans to deliver a profit this year on the basis of adjusted EBITDA (earnings before interest, tax, depreciation, and amortization). However, interest rate cuts could reignite the housing market in a big way, which might see Redfin's revenue and profitability top all expectations.
NYSE: SE
Key Data Points
2. Sea Limited: A growing force in the digital economy
Singapore-based Sea Limited is a triple threat in the digital economy. It operates in three core segments, all of which are centered around the consumer:
- E-commerce: This is Sea Limited's largest source of revenue. It's driven by Shopee, a hybrid consumer-to-consumer and business-to-consumer online shopping platform.
- Digital entertainment (gaming): This is Sea Limited's second-largest source of revenue. It's driven by the Garena game studio, which is responsible for popular mobile titles like Free Fire and Call of Duty: Mobile.
- Digital payments: Sea Money is a provider of financial services, from payments to digital banking. It also makes small-scale loans to consumers, and even to merchants on the Shopee platform to help them grow their business.
Sea Limited generated a record-high $13.1 billion in total revenue during 2023, but that represented modest growth of just 5% year over year. The e-commerce segment performed well with revenue growth of 24%, and the digital payments segment saw 44% growth. But the digital entertainment business reported a 44% decline, weighing on the rest of the company.
Sea Limited's gaming business peaked at the height of the pandemic and it's still trying to find a bottom. However, its quarterly active users came in at 528.7 million during the fourth quarter of 2023, which was a year-over-year uptick of 8.9% -- that's a sign things are improving, and revenue growth could soon follow.
On the e-commerce side, Sea Limited is focused on improving efficiency right now. It reduced its logistics costs by 12% in Asia in Q4 by introducing more automation and making operational improvements.
That brings me to another key reason Sea Limited's overall revenue growth has been slow: cost management. Compared to 2022, the company reduced its operating costs by 15.9% throughout last year by pulling money from growth initiatives like marketing, to allow more money to flow to the bottom line as profit.
As a result, Sea Limited's 2023 net income came in at $162.7 million, which was a huge positive swing from the $1.6 billion net loss it generated in 2022.
Sea Limited stock is sitting on a 40% gain in 2024 so far, but it remains 85% below its all-time high. Falling interest rates will put more money in the pockets of consumers, which will be great for all three of its businesses, and it could lead to an acceleration in the company's overall revenue growth this year -- especially if the gaming segment has bottomed. Therefore, it's probably not too late to buy.
