Redfin (RDFN +0.00%) is a real estate technology company, and it operates one of the largest brokerages in America. The rapid rise in interest rates during 2022 and 2023 shrank the borrowing capacity of most consumers and put the brakes on the housing market, which crushed Redfin's primary business.
With that said, the company continues to deliver modest revenue growth. It's using this tough period to cut costs and right-size its business, which has significantly improved its bottom line.
That hasn't stopped the slide in Redfin stock, which now trades 92% below its all-time high. It's sitting at a rock-bottom valuation based on one widely used measure, and with the U.S. Federal Reserve expected to cut interest rates in September, here's why this could be a golden buying opportunity for investors.
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Redfin is making the most of a tough situation
Redfin's single largest source of revenue used to be RedfinNow, an iBuying operation which purchased homes directly from willing sellers and attempted to flip them for a profit. The company closed the segment in 2022 to avoid losses on its inventory of homes as interest rates soared. Redfin is now focusing on its portfolio of services, which include brokering, mortgages, and closing services.
During the recent second quarter of 2024 (ended June 30), Redfin and its 1,719 lead agents represented 0.77% of all home sales across the U.S., which was up from 0.75% in the year-ago period. The company also achieved a mortgage attach rate of 28%, which is the proportion of customers who used Redfin to buy and finance their home.
Redfin designed its business model to sell a high volume of homes and build market share. It charges an enticing listing fee of just 1.5%, which is much lower than the typical 2.5% fee across the rest of the industry. Plus, repeat customers are charged just 1%, and the company said they accounted for 37% of all sales during Q2.
Redfin's second-quarter revenue came in at $295.2 million, which was a 7% increase from the year-ago quarter. That was a great result considering U.S. existing home sales actually declined over the same period, which is further evidence of Redfin's growing market share. Plus, the company broke even on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, which was a big improvement over the $6.9 million EBITDA loss it generated in the year-ago quarter.
Redfin has improved its profitability by trimming costs. The company launched Redfin Next earlier this year, which is an opt-in program for agents who want to be paid higher commissions in exchange for giving up their salary. That can eliminate fixed employee expenses from Redfin's books, and it allows the company to hire more agents to grow its market share with practically upfront cost. The Next program will be available to all agents across the company next year.
The Fed could cut interest rates three times before the end of 2024
Higher interest rates have crushed the housing market. I mentioned the slowdown in U.S. existing home sales earlier, but I now want to highlight the magnitude. Existing home sales came in at 3.89 million annualized units in June (the most recent number), which was down by a whopping 41% from its recent peak of 6.6 million annualized units in 2021.
The Consumer Price Index (CPI) measure of inflation hit a 40-year high of 8% in 2022. That's why the Fed aggressively raised the federal funds rate from a historic low of 0.25% all the way to 5.50% in the span of just 16 months (between March 2022 and July 2023).
However, the most recent data shows the CPI has cooled to 3%, and it's clearly trending toward the Fed's target of 2%. As a result, experts predict that interest rate cuts are imminent. In fact, according to the CME Group's FedWatch tool, there could be as many as three cuts before the end of 2024 (in September, November, and December).
That will help the housing market in two ways:
- It will increase consumers' borrowing capacity, which gives them more buying power.
- It incentivizes existing homeowners who are eager to sell but don't want to give up their current low fixed rate. That could drive more listings and increase housing supply.
Both of those factors will lead to more real estate transactions, which is great for Redfin's business.
NASDAQ: RDFN
Key Data Points
Redfin stock trades at a rock-bottom valuation
The price-to-sales (P/S) ratio is a popular way to value companies that don't have consistent earnings (profits). It's calculated by dividing a company's market capitalization by its annual revenue.
Redfin has a market cap of $901 million as of this writing, so based on its trailing 12-month revenue of $1 billion, its stock trades at a P/S ratio of less than 0.9. In other words, investors value Redfin at less than a single year's worth of its revenue, which is effectively rock bottom.
For context, that's substantially below Redfin's peak P/S ratio of almost 10 from 2021, and it's also below its average P/S ratio of 2.6 going back to 2017, when the company first came public.
RDFN PS Ratio data by YCharts.
In my opinion, the suppressed valuation might be unwarranted, given that Redfin's business is improving by most metrics. Plus, the company has a stable cash position with $201 million on hand, with an additional $208 million in loans (mortgages) it intends to sell. Considering it expects to break even on an adjusted EBITDA basis this year, it's unlikely to surprise investors with a request for fresh capital via an equity raise in the foreseeable future.
That might spell an opportunity for investors. The FedWatch tool predicts a 100% probability of an interest rate cut in September, so it could be a good idea to buy Redfin stock before then with the intention of holding on for the long term to capture the housing market recovery.
