What happened
Shares of technology-enhanced real estate broker Redfin (NASDAQ: RDFN) were up 21% today as of market close. It's more of a consolation prize for those shareholders (myself included) holding the bag on Redfin. The stock has collapsed over 70% so far in 2022 even after today's jump.
Image source: Getty Images.
So what
In the week since the company reported first-quarter 2022 earnings, Redfin itself hasn't issued any specific financial news. Rather, the stock is at the whim of the stock market overall, which is currently hyperfocused on the Federal Reserve's interest rate hikes and monetary tightening policy. The Fed hopes these adjustments will cool off the job market and in turn help lower the inflation rate.
For a company like Redfin, higher interest rates aren't fantastic news. Stocks are valued based on future cash flows, and higher rates thus lower the present value of a stock. Redfin is especially susceptible to this effect because it currently doesn't turn a consistent profit. Net loss in Q1 was $90.8 million, far better than Redfin had forecast but still not the type of performance the average investor wants to see in the current market environment.
Now what
Of interest to investors in the real estate space, Redfin did provide some updates on its view of the U.S. housing market subsequent to the Q1 report. With mortgage rates on the rise, some home sellers are beginning to drop prices to attract a buyer. And, according to Redfin, pending sales fell 6% year over year in the four-week period ended May 8, the biggest drop since June 2020. Clearly, while the housing market remains hot for those consumers still trying to buy, signs are emerging that a slowdown is coming.
And that, dear readers, is what has Redfin down in the dumps right now. The market is pricing in a fairly severe downturn (or extended slowdown) for Redfin and the residential real estate industry. Redfin itself is still growing and picking up market share, but it's now priced at 0.5 times trailing-12-month revenue. That isn't unfair, especially considering the company is burning through cash. (Free cash flow was negative $201 million over the last 12-month stretch.)
However, if you believe the company's tech-enhanced platform for buying and selling homes has a bright future, now could be an advantageous time to nibble. Just don't expect any near-term end to the wild volatility.
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Nicholas Rossolillo and his clients have positions in Redfin. The Motley Fool has positions in and recommends Redfin. The Motley Fool recommends the following options: long May 2022 $22 calls on Redfin, short May 2022 $26 calls on Redfin, and short May 2022 $28 calls on Redfin. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
