Stock Redfin: Collapse Didn’t Go Far Enough For Bears

by Redfin (NASDAQ:RDFN) The 73% decline in the past 12 months has been dramatic, usurping the pandemic-era rally and leaving the future of the residential real estate brokerage company in marked uncertainty. The Seattle, Wash.-based company is now trading at a third from its IPO price level in 2017 with a 19% short interest attached to its commons and with continued macroeconomic uncertainty, giving little reason to believe there will be short-term respite. Is this an opportunity to go fishing at the bottom of a company whose market capitalization now stands at 890 million dollars against a turnover of 12 months $2.45 billion?

To understand the possible direction of the commons this year, you will need to examine the underlying reasons why the market decided to reduce the valuation multiple attached to Redfin. The company’s price/sales ratio now sits at 0.36x by more than 10 times just over two years ago and is about 93% below the median of its peer group.

Existing US home sales fell for 11 consecutive quarters in December 2022 as demand cooled rapidly due to higher federal funds rates. That pushed the 30-year mortgage rate to 6.12%, its highest level since 2008, but down from highs north of 7% in November last year to provide some slack. The situation is critical with total home sales in 2022 to just over 5 million, down 17.8% from 2021.

Income flatlines as housing slows

Housing affordability has become increasingly out of reach for millions over the past 12 months due to a historic squeeze in the cost of living catalyzed by high inflation and rising mortgage rates. The specter of a recession also contributed to a rapid collapse in buyer sentiment, with existing home prices falling 11.3% from their recent peak. Therefore, with the fed funds rate set for at least two more 25 basis point hikes, 2023 could at least see lackluster operational performance from Redfin as higher rates work their way through the economy.

Redfin last reported revenue of $600.5 million for its third quarter of fiscal 2022. This is an increase of 11.2% over the prior year comparison, but a shortfall of $2.15 million from estimates consensual. The company deploys technology to optimize the home buying and selling experience and generates revenue by charging listing fees for each home sold on its platform.

The company also had an iBuying business, RedfinNow, which it shut down in November last year. This has essentially seen Redfin use its balance sheet to finance the purchase of homes with the aim of selling at a higher price at a later date.

Gross profit in the quarter was $58.08 million as margins fell sequentially from 19.44% to 9.67%. This was mainly due to the sale of RedfinNow homes at what management described as prices below expectations in their earnings call. The company expects gross profit for its real estate segment for the fourth quarter to be negative, bringing the full year figure to a loss of between $22 million and $26 million.

Redfin faces uncertainty and withdrawal could have more legs

The company is expected to announce its fiscal 2022 fourth quarter results on Feb. 16 and provided guidance. Revenue is expected to be between $430-459 million, a huge miss from the consensus of $557.32 million even at the top. Net loss is expected to be no less than $118 million and would result from a net loss of $90.2 million in the prior third quarter. That was up from a net loss of $18.9 million in the comparison a year ago.

The results were poor and could worsen, with housing affordability now hovering around a 15-year low, rising mortgage rates and house prices still remaining at historic highs to set the backdrop for the which could be an 18% drop in property prices this year. . Redfin is taking steps to get its profitability back on track with 862 employees dismissed, i.e. approximately 13% of their workforce. About 264 of those cuts came from RedfinNow. The company expects to generate positive adjusted EBITDA in 2023 and positive net income in 2024 thanks in part to these cost reduction measures.

Those expectations come against cash and cash equivalents which ended the quarter at $475.8 million, down from $592.4 million a year ago on net debt of $1.28 billion. Total revenue for fiscal year 2022 is now pegged at around $2.264 billion, compared to $2.45 billion in 2021. I think the low multiple is warranted given a changing business model. Finances could decline further if the gloomy forecasts for the US housing market in 2023 come true. I am neutral on the stock, but the current deflated price of the commons should persist through the end of the year.