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Should Investors Be Wary of This Under-$10 Stock?

Redfin’s (RDFN) shares have declined more than 75% year-to-date and are now trading below $10. Given the persistent macroeconomic headwinds and its lower-than-industry profitability, will it be wise to buy the stock now? Read on to learn our view…

Although COVID-19 disrupted most industries, the housing sector managed to conquer the headwinds as people sought to buy their dream homes amid the prevailing rock-bottom interest rates. With a growing demand for housing, inventories diminished, leading to prices skyrocketing. People scrambled to get a piece of their dream real estate. As a result, shares of Redfin Corporation (RDFN) soared.

RDFN operates as a residential real estate brokerage company in the United States and Canada. The company operates an online real estate marketplace and provides real estate services, including assisting individuals in purchasing or selling homes. It also provides title and settlement services, originates and sells mortgages, and buys and sells homes.

However, the stock price of RDFN has declined 76.2% year-to-date and 84.2% over the past year to close the last trading session at $9.14. It is currently trading 85% below its 52-week high of $61.14, which it hit on July 29, 2021.

The stock has been under pressure as inflation has surged to multi-decade levels, and home prices and mortgage rates climbed. Despite the rise in employment and wages, surging inflation has severely impacted the buying prowess of consumers.

The gap between national housing prices (of homes sold) and the U.S. median household income has widened, aggravating wealth disparities and the broader viability of the real estate market.

Here’s what could influence the performance of RDFN in the upcoming months:

Declining Home Buying Sentiment

On July 21, 2022, RDFN, in its report for four weeks ending July 17, said that a typical home sold spent 19 days on the market, which happens to be a day longer than last year. The report revealed that the median time on the market posted a year-over-year gain for the first time in two years.

Pending home sales declined the most since May 2020, and the total number of homes for sale had its most significant rise since August 2019, despite fewer homes hitting the market than this time last year.

Mixed Financials

RDFN’s total revenue increased 122.6% year-over-year to $597.34 million for the first quarter ended March 31, 2022. The company’s gross profit increased 71.2% year-over-year to $72.53 million.

However, its loss from operations widened 146.6% year-over-year to $85.12 million. Also, its net loss widened 153.7% year-over-year to $90.80 million. In addition, its adjusted EBITDA loss widened 215.1% year-over-year to $48.84 million.

Mixed Analyst Estimates

Analysts expect RDFN’s EPS for fiscal 2022 and 2023 to remain negative. However, its revenue for fiscal 2022 and 2023 is expected to increase 28.4% and 12.7% year-over-year to $2.47 billion and $2.78 billion, respectively.

Lower-than-industry Profitability

RDFN’s 1.32% trailing-12-month Capex/S is 62.7% lower than the 3.54% industry average. Likewise, its trailing-12-month EBIT margin is negative compared to the 22.35% industry average. Furthermore, the stock’s trailing-12-month EBITDA margin is negative compared to the industry average of 54.22%.

Mixed Valuation

In terms of trailing-12-month P/B, RDFN’s 4.22x is 151% higher than the 1.68x industry average. Likewise, its 531.59% trailing-12-month Total Debt/Equity is 482.6% higher than the 91.23% industry average.

However, the stock’s 0.44x trailing-12-month P/S is 92.1% lower than the 5.55x industry average.

POWR Ratings Reflect Bleak Prospects

RDFN has an overall F rating, equating to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. RDFN has a D grade for Quality, consistent with its lower-than-industry profitability.

It has an F grade for Stability, in sync with its 1.98 beta. Also, its mixed valuation justifies its C grade for Value.

RDFN is ranked #42 out of 43 stocks in the D-rated Real Estate Services industry. Click here to access RDFN’s ratings for Value and Momentum.

Bottom Line

After the housing sector’s stellar run since the start of the pandemic, things seem to be slowing down for the sector amid higher home prices, surging inflation, and rising mortgage rates. For the second quarter ended June 30, 2022, RDFN expects its net loss to come between $72 million and $60 million, compared to the net loss of $28 million in the year-ago period.

Although the stock is now trading below $10, it could face further downside due to its lower-than-industry profitability and persistent macroeconomic headwinds. So, it could be wise to avoid the stock now.

How Does Redfin Corporation (RDFN) Stack Up Against Its Peers?

RDFN has an overall POWR Rating of F, equating to a Strong Sell rating. Therefore, one might want to consider investing in other Real Estate Services stocks with a B (Buy) rating, such as The RMR Group Inc. (RMR), Marcus & Millichap, Inc. (MMI), and Comstock Holding Companies, Inc. (CHCI).

RDFN shares were trading at $8.66 per share on Tuesday afternoon, down $0.48 (-5.25%). Year-to-date, RDFN has declined -77.44%, versus a -16.99% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.


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