If this year’s real estate outlook from Redfin (NASDAQ:RDFN) is anywhere close to being on target, owners of Redfin stock have good reason to worry. Not only is a lofty revenue growth estimate a setup for a letdown, the company’s already-growing losses could expand.
To some extent, the pullback Redfin stock has suffered since its post-IPO peak in August of 2017 already reflects doubt about the company’s foreseeable future. RDFN shares, going public at $15 per share and racing to a high above $30 just a few days later, have subsequently peeled back to their current price near $16.
Even with that selloff though, there’s still no margin for error at a time when unpredictable headwinds are starting to blow.
A Closer Look at Redfin Stock
Investors most often compare it to online real estate listing venue Zillow Group (NASDAQ:Z). It’s not an entirely off-base comparison. Both organizations allow homebuyers to look at real estate via the internet. First and foremost though, Redfin is a real estate broker that also happens to maintain a website of listings.
And yet, that’s still not all the company is. In 2017, Redfin launched a service called Redfin Now, offering to outright purchase homes rather then merely list them for sale. Although the service is only available in select markets, the company hopes to expand Redfin Now in the future.
The cash-intensive strategy is as risky as it sounds, potentially leaving Redfin holding properties it may struggle to sell should the market take a sudden turn for the worse.
And, the real estate market isn’t exactly moving in the opposite direction at this time
A Potential Slowdown and Redfin Stock
Never let it be said the company wasn’t completely honest with RDFN shareholders.
In December, Redfin warned this year’s housing market “will be coolest we’ve seen in years.” Though home ownership will continue to rise, it only expects prices to improve on the order of 3%, versus an average growth rate of 5% since 2015. But, Redfin conceded that the forecast was far from certain, and it is possible home prices could actually contract for the first time since 2011.
The alarming outlook isn’t without its basis.
Although still on the rise, month-to-month home price growth has already been slowing since the beginning of this year; both the Case-Shiller Index and the FHFA Home Price Index indicate this headwind.
And worse, purchases of both new and existing homes have been trending downward since peaking in November of last year.
Given the weakening number of purchases, it’s surprising home price growth hasn’t already slowed more dramatically. That stall may quietly be taking shape though.
Higher interest rates are a partial culprit, though CEO Glenn Kelman cites another explanation for the brewing slowdown: the high-paying jobs that tend to accompany growth from technology companies, which tend to concentrate workers in one particular city or area and make homes affordable for others.
“We should want high-paying jobs, but when housing prices blow up in Boise or Salt Lake or Denver, a mob forms and they want answers,” jibing with the company’s 2019 outlook, which noted, “Growing cities will have to start building more housing now if they don’t want to face the affordability and homelessness problems that established tech hubs like Seattle and San Francisco are currently facing.”
The technology sector’s companies, however, are moving faster than local governments are. The imbalance may worsen before it improves.
It all points to a tough 2019 for Redfin.
Bottom Line for Redfin Stock
Still, analysts are collectively calling for significant revenue growth, modeling a top-line improvement of 24% in 2019 after what should be a near-30% improvement for 2018. The market doesn’t even entirely mind that 2019’s expected per-share loss of 86 cents is considerably bigger than 2018’s projected loss of 54 cents.
Although still losing money and expanding those losses, investors have given Redfin some leeway, treating it more like a tech outfit than a real estate broker.
While its current revenue growth is intoxicating, 2019’s top-line target could quickly slip out of reach if the fragile real estate market collapses on itself, a scenario that would almost certainly pull the company’s results deeper into the red.
That would change the perception of Redfin in a hurry, and perception is everything for a story stock like RDFN that doesn’t have any net earnings to speak of.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.