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Let’s be honest: It’s not a great time to be a Redfin (NASDAQ: RDFN) stockholder. The online residential real estate broker in the US and Canada has had a horrid time in the last 12 months. The stock is down almost 85% from its 52-week high of $65.41. In 2022, shares of Redfin have declined by 73%, at the time of writing.
And from the looks of it, it’s only going to get tougher for the company due to a slowing economy, rising interest rates, and a surge in inflation numbers. Currently, even though sellers are outnumbered by buyers, the number of people looking to buy homes is falling by the day.
The Good: A look at Q1 numbers for Redfin
Redfin announced its earnings for Q1 2022 on May 6 and reported revenue of $597.3 million, an increase of 123% year over year. However, its net loss stood at $90.8 million or $0.86 per share, compared to a loss of $35.8 million or $0.37 per share in the year-ago period.
Redfin claimed that it has a 1.18% market share of existing US home sales, up 2 basis points from Q1 of 2021. The company’s online reach expanded as the average monthly users for its mobile apps and website rose to 51 million, up 11% from the corresponding period in 2021.
Redfin also announced its acquisition of Bay Equity Home Loans on April 1. This is in line with the company’s strategy to become a super-platform where a consumer can buy, sell, rent, and finance their home.
Redfin CEO Glenn Kelman said the company is "on pace to nearly double the percentage of Redfin homebuyers who get a Redfin loan, at roughly double the gross profits from each customer."
For Q2 2022, the company is projecting revenue between $613 million to $650 million and a net loss between $60 million to $72 million.
The Bad: Recession and slowdown in home prices will impact Redfin stock
There are widespread predictions of a recession in the latter half of 2022 or in the first few months of 2023. In its April 19, Economic and Housing Outlook report, Fannie Mae said, “We have downgraded our total home sales forecast for 2022 to a decline of 7.4% (previously a 4.1% decline) followed by a decrease of 9.7% in 2023 (previously a 2.7% decline).”
While home prices in the US are getting more expensive, Fannie Mae said that house price growth will also slow down. Its report said that price growth would decelerate from 20% annual growth in Q1 2022 to 10.8% by year-end, and further to 3.2% in 2023.
Housing sales in the US have been falling every month since December 2021, from 871,000 units in that month to 763,000 units in March 2022. The April housing sales report will be out on May 24. It is unlikely to see a reversal.
On May 12, Redfin said, “Pending [housing] sales fell 6%, the largest year-over-year decline since June 2020.” Mortgage payments are through the roof as well. The average monthly mortgage is now at $2,427, a record high and up 44% from $1,685 in the same period in 2021. Redfin Chief Economist Daryl Fairweather said, “Rising mortgage rates have taken a notable bite out of demand.”
Gross margins for the company have steadily been falling. It was 26.8% in Q2 of 2021, 23.6% in Q3 of 2021, 16.8% in Q4 of 2021, and 12.1% in Q1 2022. With the slowdown predictions, Redfin’s bottom line could take a further hit.
Redfin stock closed at $10.25 on May 18. The average analyst target price for the stock is $16.58, a potential upside of over 60%. However, there is a solid chance that the stock can fall further.
A contrarian investor would say that this is the perfect time to be greedy and start accumulating stock. They might very well be right. But anyone who enters the stock right now should be prepared to face high levels of volatility.
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