Is This Real Estate Stock A Long-Term Winner?

Key Takeaways

• Redfin was founded in 2004 and was the first company to show homes for sale on an interactive map.
• Revenue was up in the second quarter of 2022 as the company continues to make inroads in the traditional real estate model.
• The future outlook is hazy, as the housing industry faces headwinds that will directly impact Redfin and its bottom line.

Redfin entered the real estate world in 2007 by changing how homes were bought and sold, pioneering the use of interactive maps. Over the years, the company has evolved while keeping to its roots in disrupting the traditional real estate industry. Financially speaking, the company is doing well. However, with the issues facing the economy and, more specifically, the housing market, Redfin has some tough times ahead. Here is what investors need to know before investing in this stock.

Redfin operates in the U.S. and Canada, their services are available in over 1,000 metropolitan areas across the U.S. and they are expanding into new markets every year. They cater more to do-it-yourself home buyers and sellers who don’t need a lot of hand-holding during the process. However, they do offer buyers and sellers professional help when they need it.

In 2007, Redfin was the first company to put real estate listings on an interactive map. In addition to buying and selling homes, Redfin offers title and settlement services and originates mortgages.

What sets the company apart is the fees they charge for selling a home. Traditional real estate agents charge 3% for selling a house. Redfin also charges 3% but rebates around 1% to the buyer.

In 2021, Redfin purchased RentPath so it could begin to offer rentals to people who were interested in renting rather than buying a home. Redfin expanded again in 2022 by purchasing Bay Equity Home Loans so it could start to offer mortgages to buyers.

Redfin Income Statement Review

For the second quarter of the 2022 fiscal year, Redfin had revenue of $606.9 million, compared to $471.3 million for the same quarter in the 2021 fiscal year. This was an increase of 29%. However, gross profit decreased from $126.1 million in the second quarter of the 2021 fiscal year to $118 million in the current quarter. The issue here was rising costs due to inflation. The company reported a net loss for the quarter of $78.1 million, a 180% increase from the net loss of $27.8 million from the same period a year ago.

Looking forward to the third quarter of the current fiscal year, Redfin expects to grow revenue by 9-16% compared to the prior year. This would be between $590 million and $626 million. Redfin expects to see an overall net loss between $79 million and $87 million during the quarter, primarily due to headwinds in the housing market.

Balance Sheet

Redfin has $1.31 billion of current assets, an increase of 5% over the $1.25 billion from a year ago. Cash and equivalents totaled just $379 million — causing concerns as the industry is slowing. Total liabilities for the second quarter of the 2022 fiscal year are $1.94 billion compared to $1.67 billion for the second quarter of the 2021 fiscal year.

Redfin Stock Outlook

The outlook for Redfin stock is cloudy, especially over the short term. There are positive signs, increasing market share compared to traditional real estate firms, as well as expansion into new markets. Additionally, their rental business is growing, as is their mortgage lending arm.

The problem that Redfin faces is a troubled housing market. Demand is expected to slow as higher interest rates put the cost of owning a home out of reach for many buyers. This also includes people who now spend more money each month on essentials, leaving less income to put toward a home.

Finally, home builders are beginning to ease construction, which will also hurt sales as fewer homes are made available. This would typically increase prices since demand is higher than supply. However, with demand slowing, fewer homes to buy won’t have an impact in the short term.

As for the stock itself, Redfin is down 91.64% year to date closing at $4.41 per share on October 13. Since going public in 2017, the stock price has averaged around $20 per share. The exception is from 2020 through early 2021, when the stock rallied to $96.59. It has since been on a steady decline.

To sum everything up, investors need to be patient with this stock. It might be tempting to buy now that the price is under $5 per share, but there is no reason to invest immediately, as the stock price won’t begin to trend higher with the current housing outlook. Because of this, investors can slowly pick their spots to invest.

If the company can survive this downturn in the market, they have the foundation to grow in the coming years. Not only are more home sellers choosing to list with Redfin, but buyers are starting to use the company for mortgage origination and help finding rentals.

For investors that feel that individual housing stocks are too risky, another option is to consider Q.ai’s Investment Kits. These kits are built based on themes using AI technology. For example, investors could choose the Inflation Protection Kit or the Infrastructure Spending Kit.

Bottom Line

Redfin has been disrupting the real estate business since its founding, and it plans to continue. For investors, this could be a long-term stock that has the potential to offer healthy returns. However, in the short term, there are too many economic issues to make this a must-own stock now. A better option is for investors to spot buying opportunities and react slowly to build a position over time.

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