Redfin (NASDAQ:RDFN) plunged in trading following earnings. The Seattle-based real estate brokerage company lost over 22.4% of its value despite beating earnings and revenue expectations. Fears of a real estate slowdown in key metro areas weighed on RDFN stock.
Redfin survived the 2008 financial crisis. Another downturn could increase the company’s market share in the long run. However, with a slowdown just beginning, now is not the time to buy RDFN stock.
RDFN Stock Plunged Despite the Earnings Beat
Looking at earnings and revenue, the massive drop in the stock might seem nonsensical. Second-quarter earnings per share (EPS) came in at 4 cents. This beat Wall Street estimates by 2 cents per share. Likewise, revenue of $142.6 million beat expectations by $3.77 million. It also represented a 35.9% increase from last year.
However, stocks trade on expectations. Here, the immediate future does not look so bright. Years of low interest rates have sent real estate prices to stratospheric levels on both coasts. Even in the lower-cost Texas market where I live, values shot much higher — particularly in the Austin area.
Now, with higher interest rates, the corresponding higher payments and higher home costs have weighed on real estate markets across the country. This will inevitably lead to less business for Redfin or other real estate-oriented sites such as Zillow (NASDAQ:ZG, NASDAQ:Z) in the near term.
Granted, real estate markets remain both local and segmented. What happens with real estate in Chicago bears no relationship to the level of sales seen in a Tucson, Arizona or Nacogdoches, Texas. Also, luxury markets could enjoy brisk sales, while starter homes fail to generate interest. Still, investors in RDFN stock must assume that they deal with a national real estate market. If sales slow in general, that will weigh on Redfin.
Moreover, the company may have waited too long to begin the IPO process. Though the company has existed since 2004, Redfin did not launch its IPO until July 2017. Despite hopes that the company would become the “Amazon (NASDAQ:AMZN) of real estate,” Friday’s plunge brings RDFN stock down towards the original IPO price of $15 per share. If the real estate slowdown takes hold, the stock will likely fall further.
Redfin Could Benefit in the Long Run From a Slowdown
This does not necessarily spell the end for RDFN stock. The company has improved the processes of searching for both agents and homes. It has also brought its customers thousands of dollars in savings.
Also, slumps do not last and, often, the most influential companies improve their market positioning during difficult times. Customers fearful of a down market could see a greater motivation for turning to Redfin. A slowdown can also enable the company to acquire assets more cheaply. Once the market begins to recover, RDFN stock could enjoy a bright future.
However, in the near-term, fewer sales will likely lead to lower revenue. It could also bring a return to the quarterly losses RDFN stock appeared to be escaping. With such a potential loss looming, making a near-term case for RDFN stock becomes more difficult.
The Bottom Line on RDFN Stock
Despite beating estimates on earnings and revenue, RDFN stock finds itself captive to a slowing national real estate market. The stock dived more than 22% in Friday trading. Fears of a slowing market outweighed the positive sentiment that usually comes with beating earnings and revenue estimates.
As a company, Redfin may benefit from such a slowdown. Hard times often allow companies to acquire assets more cheaply and improve market share. Such an occurrence leaves the company in a stronger position once the market recovers.
However, in the short-term, RDFN stock will become the victim of such a slowdown. Given the lack of immediate growth prospects, investors should stay away for now.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.