Real estate technology company Redfin(NASDAQ: RDFN) has taken investors on quite a roller-coaster ride. After losing more than 95% of its peak value after the real estate market slowed to a crawl in 2022, the stock has more than tripled from the lows and is up by more than 50% in the past couple of weeks.
However, with Redfin still trading at a rather small market cap ($1.3 billion) and several big catalysts that could help the business over the next few years, it could still be a great stock to buy and hold for the long run.
1. Management is laser-focused on profits
As Redfin's management has correctly pointed out, the real estate market of the past few years has been terrible. But the company has done a great job of setting itself up for future success by focusing on efficiency and profitability.
Just to name a few recent stats, Redfin's trailing-12-month adjusted EBITDA loss has narrowed from $145 million in the first quarter of 2023 to $33 million in the most recent quarter. Gross margin has improved by 70 basis points over the past year. And while the core real estate services business isn't profitable right now (understandable in a slow market), the rental business and mortgage business both are.
2. Interest rate tailwinds
Falling interest rates should be a big catalyst for Redfin's business, and for a few reasons. In fact, it is the recent shift in expectations for the pace and timing of Federal Reserve rate cuts that caused the stock to skyrocket higher in recent weeks.
The primary reason (I'll get to some others later) is that falling interest rates could unfreeze the real estate market in the United States. Existing home inventories remain near a generational low, as homeowners who have low mortgage rates are reluctant to sell. If mortgage rates were to fall into the 5% rates, that could change.
US Existing Home Inventory data by YCharts
While Redfin agents certainly handle both sides of home sale transactions, the company positions itself as the most cost-effective way to sell a home. If existing home sales accelerate, it could be a major tailwind for Redfin's business.
3. NAR settlement
The National Association of Realtors and several top brokerage firms reached a settlement that just recently went into effect. In short, it makes a big change in the way real estate agents get paid, and the level of pricing transparency that is required.
This could be a big deal for traditional agents. Sellers have traditionally covered the commissions for both the buyer's and seller's agents, but now buyer's agent commissions must be negotiated directly between homebuyers and their agents. And on both sides, the settlement is making buyers and sellers far more fee-conscious than ever before.
While this could hurt traditional real estate brokers, it could end up being a net positive for Redfin. As the only major broker looking to disrupt the traditional pricing structure, fee-conscious consumers could flock to Redfin's platform in this environment.
4. Pent-up housing demand
Elevated mortgage rates aren't just keeping potential sellers in their homes. They are keeping would-be homebuyers on the sidelines as well.
I would argue that if mortgage rates were to fall from the current level in the 6.5% range to about 5%, it would have a far greater impact on the market than if prices were to fall by say, 10%.
Think of it this way. If you wanted to buy a $500,000 home at a 6.5% mortgage rate with a 20% down payment, you'd pay $2,528 per month in principal and interest. If the rate stayed the same, but the home's price fell by 10% to $450,000, your payment would fall to $2,275. If, on the other hand, the price stayed the same but your interest rate fell to 5%, the monthly payment would be $2,147.
In short, if rates were to fall, it could have a big impact on home affordability, and buyers could come rushing into the market.
Not a low-risk stock
On one hand, there are some good reasons why investors might still want to consider Redfin, even after its recent rally. But on the other hand, it's important to point out that Redfin is still a rather speculative stock. It isn't a profitable business yet, and it needs a lot to go right to achieve consistent profitability -- especially to the degree that would justify a significantly higher valuation.
To be sure, I own Redfin stock and believe the company's brightest days are ahead of it. But it's by no means a sure thing, and even if things go well, I fully expect quite a bit of volatility along the way.
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Matt Frankel has positions in Redfin. The Motley Fool has positions in and recommends Redfin. The Motley Fool recommends the following options: short August 2024 $11 calls on Redfin. The Motley Fool has a disclosure policy.
