The real estate industry is in rough waters, with high interest rates, tight housing supply, and the fallout from the recent NAR lawsuit causing turbulence and turning the industry upside down. However, amidst this chaos, Redfin (NASDAQ:RDFN), a prominent player in residential real estate brokerage, presents an intriguing contrarian investment opportunity.
Despite a market slowdown, Redfin has showcased quarterly revenue that exceeded estimates. While the housing market’s uncertainty makes this investment a risky endeavor, the stock trades at a significant discount, and with a potential cut in interest rates on the horizon, the current scenario could be the right time for a value-based investment in RDFN.
Redfin’s Making Lemonade From Lemons
Redfin is a residential real estate brokerage that uses a blend of advanced technology and its agents to offer services to customers in over 100 markets across the U.S. and Canada.
In the face of a challenging real estate slowdown, post-pandemic highs, and after an NAR settlement that changed the industry to its core, such as reforming commission rates, the company has embraced a strategic plan focused on expanding its marketplace with rental and for-sale listings.
Results have been promising, and its market share, loyalty, and luxury sales have significantly increased, especially in the four California markets. Revenue, gross profit, and adjusted EBITDA have all improved year-on-year, suggesting higher spending and revenue generation efficiency.
In Q1 2024, Redfin reported a market share of 0.77%, a subtle rise from the previous quarter, achieved by Redfin’s 1,658 lead agents who helped represent the company in all U.S. home sales. Its innovative move to decrease listing fees to 1.5% or 1% (if the seller also purchases its next home with Redfin) is proving successful, with over a third of Q1 transactions coming from recurring customers.
Additionally, its cross-selling record for mortgage services has recently reached the highest levels to date, reaching an attach rate of 30%, driving more earnings with each transaction.
Redfin’s Recent Financial Results & Outlook
The company reported mixed results for the first quarter of 2024. Revenue was $225.48 million, surpassing analysts’ expectations of $217.84 while marking a 5% year-over-year increase. Gross profit for the quarter was $70.8 million, a significant 22% increase year-over-year. Real estate services gross profit followed suit with a 28% increase, reaching $20.3 million, and a gross margin of 15%, up from 12% the previous year.
Adjusted EBITDA was a loss of $27.6 million, though it improved compared to the $63.6 million loss from Q1 2023. Reported earnings per share slightly exceeded estimates of -0.58, standing at -$0.57.
Management has given guidance for the second quarter of 2024 and expects total revenue of $285 million and $298 million, indicating a year-over-year change of 4% to 8%. Net loss is anticipated to be between $34 million and $28 million, marking an increase from the $27 million loss of Q2 2023. The company also plans to pay a quarterly dividend of 30,640 shares of common stock to preferred stockholders.
What Is the Price Target for RDFN Stock?
Analysts following the company have taken a cautious approach to the stock. For example, Needham analyst Bernie McTernan recently reiterated a Hold rating on the shares, noting that while the company has taken steps to improve its financial health and expand its market share, the current market risks may potentially limit the stock’s upside in the near term.
Overall, Redfin is rated a Hold based on the recommendations and price targets recently assigned by 12 analysts. The average price target for RDFN stock is $6.73, representing a potential upside of 11.98% from current levels.
The stock has been battered over the past few years, losing over 90% in three years. It trades toward the bottom of its 52-week price range of $4.26 – $17.68 and demonstrates ongoing negative price momentum, trading below the 20-day (6.08) and 50-day (6.27) moving averages. The slide in price has been more dramatic than that of the industry, causing the shares to trade at a relative discount with a P/S ratio of 0.7x compared to the Real Estate Services industry average of 1.6x.
Bottom Line on Redfin
Redfin has become a compelling contrarian investment in a challenging real estate market. Despite uncertainties, the company has exemplified resilient financial performance, beating estimated revenues and showing growth in critical areas such as market share, cross-selling, and luxury sales.
Even though the firm’s journey hasn’t been smooth, with shares losing over 90% value in the past three years, the current scenario has paved the way for a potential value-based investment, as the stock trades at a significant discount. The possibility of a cut in interest rates and Redfin’s strategic growth initiatives could make this compelling for value investors interested in a high-risk, high-reward opportunity.
