The housing market is red-hot and Redfin is posting record revenues, however profits remain elusive.
Redfin (NASDAQ: RDFN) operates an online real estate platform that provides services for residential real estate transactions. The company produces revenues from advertising sales through Redfin real estate professionals, and purchasing and reselling homes.
I am neutral on RDFN stock.
Housing Market
The U.S. housing market is experiencing robust demand. Home prices are up significantly year-over-year, although the number of homes sold has fallen slightly.
The median sales price of a single-family home in November 2021 was $383,281, or 15.1% higher than in 2020. Another indicator of strong demand is that homes sell on average for slightly over list price. A house sold above the list price generally indicates a bidding war. The ratio of sale-to-list price in November 2021 was 100.6%, according to Redfin.
The strong demand is not expected to end anytime soon. According to CNBC, the U.S. is short over 5 million homes. The study also found that construction is not keeping up with the market’s needs.
For Redfin, this means that its services will be in demand, and revenues should continue to rise. The company will make more revenue as home prices increase based on realtor fees and home buying and selling. Advertising should also be robust as realtors seek to take advantage of favorable market conditions.
Profits Prove Elusive
Redfin has posted $1.5 billion in top-line revenue over the trailing 12 months (TTMs). This towers above the $886 million posted for Fiscal Year 2020.
Gross profit also rose to $376 million from $232 million over the same timeframe. Unfortunately, the company has not made significant operating profits in several years.
Over the TTMs, Redfin has lost $45 million from operations. This is not a consequential loss; however, with conditions currently highly favorable, one must wonder how the company would fare in a down housing market.
Investors also seem concerned about the lack of profitability. The stock is down well over 50% since its high in early 2021 to trade under $40 per share.
Further concerning is Zillow’s discontinuation of its home buying and selling service. Zillow (Z) revealed in late 2021 that it had an excess inventory, and would exit the home buying market at the end of 2021.
There are worries that large corporations’ inability to profit from buying and selling homes is a pervasive issue. On the other hand, eliminating Zillow’s program means there is one less competitor in the home buying and selling market.
On Wall Street
Turning to Wall Street, analysts are quite reserved about RDFN stock. Just three analysts have Buy ratings, to go along with five Holds and one Sell rating. Overall, analysts have a Hold consensus rating.
The average RDFN price target of $59.29 implies 52.8% upside from the current price.
Bottom Line
Redfin stock is down considerably from its highs, and the downward momentum shows little sign of stopping. The housing market is very favorable, and revenues and gross profits are up significantly.
Unfortunately, the company has not been able to translate this to profits. Zillow’s exit from the stage may be an opportunity for Redfin with one less competitor in the marketplace.
However, it could also be a warning sign of the difficulty for large corporations purchasing and selling homes profitably on the open market.
At this time, Redfin stock needs a catalyst, like a blowout quarter, to turn the tide.
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Disclosure: At the time of publication, Bradley Guichard did not have a position in securities mentioned in this article.
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