The past six months have been a windfall for Redfin’s shareholders. The company’s stock price has jumped 40.2%, hitting $11.13 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Redfin, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Redfin Will Underperform?
Despite the momentum, we're swiping left on Redfin for now. Here are three reasons why RDFN doesn't excite us and a stock we'd rather own.
1. Decline in Brokerage Transactions Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Redfin, our preferred volume metric is brokerage transactions). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Redfin’s brokerage transactions came in at 9,866 in the latest quarter, and over the last two years, averaged 8.5% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Redfin might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.
Redfin Brokerage Transactions 2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Redfin’s earnings losses deepened over the last five years as its EPS dropped 10.6% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. Consumer Discretionary companies are particularly exposed to this, and if the tide turns unexpectedly, Redfin’s low margin of safety could leave its stock price susceptible to large downswings.
Redfin Trailing 12-Month EPS (Non-GAAP) 3. Restricted Access to Capital Increases Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Redfin posted negative $30.89 million of EBITDA over the last 12 months, and its $943.6 million of debt exceeds the $183.5 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Redfin Net Debt Position We implore our readers to tread carefully because credit agencies could downgrade Redfin if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope Redfin can improve its profitability and remain cautious until then.
Story ContinuesFinal Judgment
Redfin doesn’t pass our quality test. After the recent surge, the stock trades at 86.3× forward EV-to-EBITDA (or $11.13 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at our favorite semiconductor picks and shovels play.
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