Real estate has been one of the best performing industries amid the COVID-19 pandemic thanks to a surge in home buying. The Fed’s easy monetary policy and asset repurchases have pushed interest rates to historic lows, making real estate investments lucrative. Consequently, a shortage of inventory and endless bidding wars have driven property prices to unprecedented highs. The remote work culture has also motivated people to migrate to low-cost towns from expensive cities.

In addition, the pandemic pushed up demand for remote services and, hence, one factor that has worked in favor of real estate companies is the rapid adoption of digitalization. A case in point is tech-first real estate company Redfin Corporation (RDFN). RDFN operates a digital real estate marketplace that offers online residential broking services and allows homebuyers to schedule virtual home tours. The company also delivers ancillary services, such as loan origination and title services, to facilitate a speedy process.

On March 31, RDFN had a 1.14% U.S. market share by value. Driven by its unique business model and given the red-hot housing market, shares of RDFN have returned 92.2% over the past year. In fact, the stock registered a  5.2% intraday gain yesterday to close the session at $57.16.

So, let’s take a closer look at the factors that could influence RDFN’s performance going forward:

The Tech-driven Housing Market

Real estate transactions have traditionally been conducted through in-person home tours and reams of paperwork. However, the housing market is witnessing a change and homebuyers are increasingly relying on technology to complete real estate transactions remotely. According to a survey by RDFN, last year nearly two-thirds of homebuyers made an offer on a home without seeing it.

RDFN’s CEO Glenn Kelman recently shared some of his observations on just how unusual the current U.S. housing market has become. He said, “Inventory is down 37% year-over-year to a record low. The typical home sells in 17 days, a record low. Home prices are up a record amount, 24% year over year, to a record high. And still homes sell on average for 1.7% higher than the asking price, another record.”

Recent Financial Results

In the first quarter (ended March 31, 2021), RDFN’s total revenues surged 40% year-over-year to $268 million. Its brokerage revenue was $156.45 million. Its mobile application and website hit 46 million average monthly users during the quarter, increasing 30% year-over-year. Notably, the RedfinNow platform sold 171 homes, rising significantly from the quarter-ago sale of 83 homes. However, both real estate services transactions and the aggregate home value of transactions declined significantly versus  the subsequent period. Furthermore, the company is still not generating a profit, and losses from operations came in at $34.5 million. RDFN reported a net loss of $0.37 per share, compared to the year-ago net loss of $0.64 per share.

WallStreetBets Saga

RDFN launched its IPO in 2017 but had been a major underperformer thereafter. During its first three years as a publicly traded company, its shares hovered in the $15 – $30 range. Following this, the stock hit a low of $10 in March 2020 thanks to the coronavirus-led market crash. However, as the housing market and tech stocks rally dominated the market last year, RDFN made a steady recovery.

But the new year ushered in a new trend, and Reddit forum WallStreetBets discovered RDFN’s struggling business. Retail investors started piling up on the stock and it rocketed to $98 per share by mid-February due to a short squeeze. Now that the short squeeze frenzy has weakened considerably, shares of RDFN have settled back to earth and have retreated 16.7% so far this year.

Stretched Valuation

In terms of forward P/S, RDFN is currently trading at 3.39x, 49.3% higher than the 6.70x industry average. RDFN is trading well above the industry average in terms of forward P/B also (15.09x versus 2.07x).

In terms of forward price/cash flow, RDFN’s 82.61x is 319.94% higher than the 19.67x  industry average.

POWR Ratings Indicate Bleak Prospects 

RDFN has an overall D rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, RDFN has a D Value Grade, consistent with its significantly higher-than-industry valuation ratios.

RDFN has a grade of F for Sentiment, reflecting poor analyst confidence. The stock has a D Stability Grade, indicating that the stock is more volatile than its industry peers. Of 42-stocks in the D-rated Real Estate Services industry, RDFN is ranked #40.

Beyond what we’ve stated above, we have also given RDFN grades for Growth, Momentum and Quality. Get all the RDFN ratings here.

If you’re looking for top-rated stocks in the Real Estate Services industry, with an Overall POWR Rating of A or B, you can access them here.

Bottom Line

Real estate has historically been embraced because of its ability to deliver excess returns during bull markets and a low correlation with traditional stock and bond investments. As a result, sudden strong demand swiftly smacked into already low inventory, due to lackluster homebuilding, sending total home sales to record levels. As such, JPMorgan Chase (JPM) CEO Jamie Dimon does believe that the housing market is currently in a ‘little bit of a bubble.’

Real-estate tech companies have automated their operations and management to ensure faster turnarounds and a better return on investment. This is primarily why RDFN has been able to steadily increase its share in the domestic market. The company’s cost saving, and personalized remote services differentiates it from its peers. Its RedfinNow platform returned to growth last year and earned its first significant gross profit in the last reported quarter.

However, the company’s operations are still unprofitable, and it will take some time to live up to its mission to disrupt the real estate industry. In fact, management has further indicated that it expects losses to widen in the current quarter. So, despite the housing boom, investors should avoid betting on RDFN now until the housing market cools down a bit and the company’s fundamentals improve.

RDFN shares were trading at $58.55 per share on Thursday afternoon, up $1.39 (+2.43%). Year-to-date, RDFN has declined -14.69%, versus a 12.77% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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