This tech-enabled real estate brokerage has a lot of unique characteristics.
To say that shares of Redfin (RDFN -3.22%) have been on a wild roller-coaster ride in recent years would be pretty accurate. Right now, the stock is trading 95% below the all-time high it hit in February 2021. And at one point in mid-July 2023, the shares were up 291% year to date, but have slumped by 70% from that 52-week high.
Shares are currently trading at a beaten-down price-to-sales multiple of just 0.25. That's significantly cheaper than the company's historical average ratio of 3.2.
Before you rush out to buy this stock, here are three things the smartest investors know about this tech-focused real estate enterprise.
Doing things differently
Traditional real estate brokerages pay their sales agents entirely on a commission basis. It's not hard to see how those agents' incentives might be misaligned with those of their clients in this scenario. Time is likely the most critical factor for these agents, pushing them to try to close transactions as quickly as possible, which might not result in the best deals for their clients.
Redfin does things differently. Its agents are actually salaried employees of the company, and also receive benefits. That helps explain why they are more successful than agents at rival firms. Its focus on taking care of employees enables its agents to provide a better experience for customers.
Redfin has become the most visited residential brokerage website in the real estate industry, with a presence in over 100 markets in the U.S. Its technology has produced operational efficiencies, and its typical seller only gets charged a commission of 1% to 1.5%, about half the industry average.
This strategy has worked, as Redfin claims it has saved its customers $1.5 billion in total since its founding in 2006. Plus, the platform helps sell houses at higher prices than other brokerages. This all seems like a win-win situation.
Major revenue drivers
In 2021 and 2022, 46% and 53% of the company's revenue, respectively, was generated from RedfinNow, its home-flipping segment, through which the company bought homes to resell. In November 2022, the leadership team decided to wind this segment down. Executives said that the rationale for this move was to focus on its core brokerage operations, especially at a time when interest rates were rising.
In hindsight, it looks like this was a smart course of action. And in the long term, I think it was the right move. Even flipping homes successfully locks up a lot of capital that Redfin could otherwise reinvest in its core business. And success in that business requires the ability to accurately time the market, which can be difficult to do consistently.
In the second quarter, 66% of Redfin's revenue came from its bread-and-butter brokerage services, with the remainder coming from rentals and mortgages.
Macro impacts
As of this writing, the average 30-year fixed-rate mortgage in the U.S. is 7.9%, the highestin more than two decades. Unsurprisingly, this has caused activity in the housing sector to cool down meaningfully. Redfin data shows that in September, the number of homes sold in the U.S. was down 16.3% year over year.
Excluding the RedfinNow segment, the company's revenue decreased 14% year over year through the first six months of 2023. This is a clear indication of Redfin's exposure to the overall market. However, management remains optimistic.
"The almost miraculously good news is this," Chief Executive Officer Glenn Kelman said on the Q2 earnings call. "Most economists warned you the recession was unavoidable, and now see it as unlikely. When rates come down, the housing market will be poised to grow again."
Investors can take that how they want to, but there could be more pain before things improve. That's especially likely if inflation stays above the Fed's 2% target, a situation that could lead it to implement another rate hike.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Redfin. The Motley Fool recommends the following options: short November 2023 $12 calls on Redfin. The Motley Fool has a disclosure policy.
