Does Redfin Stock Have 36% Upside?

Since the onset of COVID-19, countless businesses and industries have taken major hits as a result of the virus and the disruption it caused (and continues to cause) on a global scale.

However, there were some who actually showed some surprising strength throughout all this — one such industry being the real estate market. Take Redfin, for example: shares in the company hit a personal all-time low of $11.60 in March of 2020, then rose nearly $85 to $96.59 by February of 2021.

However, in the months since, Redfin’s price per share has dropped significantly — down from $96.59 in February to just over $45 in August. The Seattle-based full-service real estate brokerage has certainly seen better days, but could this dip simply be overblown pessimism? 

Redfin’s Financials Are A Mish Mash

Looking over Redfin’s financials, it’s clear to see that there’s uncertainty engrained into the very foundation of the company’s earnings reports.

Looking at the most recent quarter, the company’s revenue was up to $471.3 million, an increase of 120% year-over-year. However, Redfin’s net income for the same quarter was down to -$27.88 million, a decrease of over 321% year-over-year.

Similar trends can be seen in other aspects of Redfin’s financials, as well: for instance, cash on hand for the quarter rose to $735.9 million, but net change in cash dropped year-over-year, reportedly to -$555.36 million.

Inconsistencies and contradictions like these can make it difficult to make a decision based on the company’s financials alone. As such, it’s worth examining some additional factors.

Redfin Forecast: 36% Upside

Needless to say, based on these financials, analysts are somewhat torn on which direction Redfin stock is going to go in the coming quarters.

The bulls see Redfin (RDFN) returning close to its previous high by hitting $90 a share in the next twelve months, while bearish investors are much less confident: they see Redfin dropping down to $27 a share in the same period of time.

From a discounted cash flow analysis viewpoint, the upside potential for Redfin sits at $65 per share, suggesting that the current price point does represent excessive pessimism.

RentPath and Redfin Mortgage

Shortly before going public in 2017, Redfin announced an intention to get into the mortgage business — the company planned and subsequently rolled out a mortgage lending service, which has since expanded to a majority of the U.S.

Then, back in April of 2021, Redfin acquired a rental media company by the name of RentPath for just over $600 million, making them the owners of websites such as Apartment Guide and rent.com. These two expansions show that Redfin is committed to investing in growth, but have these things actually brought growth to Redfin?

According to the company’s most recent quarterly earnings report, Redfin Mortgage has seen some revenue deceleration lately.

The company even went as far as to defer new hires for Redfin Mortgage until improvements could be made to this integral part of the business.

Similarly, RentPath has been somewhat of a money pit for Redfin: the branch of the company lost $13 million during Q2 of 2021, with another $6 million going into transaction fees for RentPath and another $37 million going into marketing media expenses.

Unless things take a turn soon, these facets of Redfin could easily continue to cause trouble.

Redfin’s Stance on Compensating Agents

There’s something of an eternal struggle with agent compensation in the real estate market: How do agencies compensate agents appropriately?

Set that number too low, and successful agents won’t feel appreciated enough. Set that number too high, and Redfin won’t be able to generate the kind of profit the company requires to satisfy investors and stakeholders.

According to Redfin’s most recent quarterly earnings call, the company plans to stick to its current compensation strategy: paying agents more for business generated from repeat and referral customers met through Redfin’s site.

Redfin’s strategy isn’t broken, so the company doesn’t presently see a need to fix anything in this regard.

Zillow Vs Redfin Vs Trulia

Of course, Redfin isn’t the only real estate brokerage website in the industry — there’s also realtor.com, Zillow (Z), Trulia, and plenty of other competitors actively vying for Redfin’s customers and realtors alike.

In the past, Redfin triumphed over all of these competitor sites on Google’s search results. Now, with a recent update to Google’s algorithm and a string of successful months for realtor.com, Redfin has seen its dominance falter somewhat.

The company’s higher-ups chalk this up to a simple trade-off, predicting that Redfin and realtor.com will go back and forth like this in perpetuity, but this explanation is somewhat simplistic and denies any real mistakes that Redfin might have made to allow realtor.com to surpass the company in search results.

Truth be told, it might be worth examining how much blame lies on the fact that the housing market itself is quite unpredictable as of late. While both home prices and home sales continue to surge, especially in Florida, how long is it expected to last?

Redfin and the Housing Market

With prices and sales on the up-and-up and mortgage rates continuing to decline, the housing market has proven to be a success story unlike anything the industry has seen in recent years.

Even with the rise and spread of COVID-19 variants throughout the U.S. and abroad, many real estate experts predict that the market will only continue to boom in the months to come.

Redfin is well aware of the tailwind in the market, and the company will likely continue to benefit greatly from it throughout the rest of 2021 and even into 2022. However, it’s worth mentioning that the fall and winter months are usually much slower for real estate, and this could factor into Redfin’s performance over the next couple of quarters.

Thankfully for the company and the real estate market at large, spring typically see a course correction.

The Bottom Line: Is Redfin Stock a Buy?

Judging by Redfin’s tumultuous financials from the past few quarters and the company’s uncertain forecast in the quarters to come, it’s no surprise that retail investors and traders have found themselves unsure of whether Redfin stock is a buy or not.

After examining Redfin’s various facets, including RentPath and Redfin Mortgage, looking at the company’s stance on compensating agents, weighing Redfin’s competition, and making a hypothesis on how the state of the housing market will continue to shape Redfin’s future, the answer seems much clearer: Redfin isn’t a buy right now as the fall and winter months approach, but current Redfin shareholders should hold onto their shares in the company — things very well could take a turn depending on what the housing market does in the months to come.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.