Redfin called 'fundamentally flawed' by analyst amid stock market havoc

Redfin branded ‘fundamentally flawed’ amid market havoc

Real estate companies such as Compass, Offerpad and Opendoor saw stock prices hit historic lows on Monday. The rout suggests investors may have deep concerns about the real estate sector.

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Amid a brutal day for real estate that saw many companies’ share prices fall to new all-time lows, an analyst downgraded Redfin’s stock and said the online brokerage’s model was ” fundamentally flawed”.

Jason Helfstein, head of Internet research at Oppenheimer & Co., wrote Monday that Redfin’s strategy is flawed because “the company continues to use a fixed-cost model for agents.” This β€œprevents the company from maximizing margins when housing markets decline and limits market share gains when markets rebound,” Helfstein explained. It also downgraded the company’s stock for underperforming an equivalent rating.

Redfin’s share price fell to $3.32 on Monday – a record high for the company – before rising slightly above $3.60 by mid-afternoon. It was down about 10% for the day and after months of falling prices. When Inman last hedged the company’s stock a month ago, for example, shares were trading at just under $5. And that price was in turn well down from the company’s all-time high in February 2021, when shares approached $100.

But Monday wasn’t just brutal for Redfin. In fact, many other real estate companies have also hit historic lows. Opendoor, fresh off an earnings report showing it lost nearly $1 billion last quarter, saw its shares tumble to $1.75 on Monday. This price was down from around $2.30 shortly before the recent earnings report and from an all-time high of over $34 per share in February 2021.

Fellow iBuyer Offerpad saw its stock price drop to an all-time low of $0.67 at some point on Monday. That was down from around $0.85 before its earnings report last week. This report showed that the company ended its profitable streak and lost $80 million in the third quarter of this year.

This chart compares the stock performance over the past three months of Anywhere (green), Compass (pink), Offerpad (orange), Opendoor (blue), and Redfin (dotted black). (Credit: bar chart

Offerpad’s stock price arguably puts it in the greatest peril; if a company’s stock trades below $1 for a month, it can be delisted from the New York Stock Exchange. In the case of Offerpad, the company last saw shares trading above $1 in late October. A rally from $0.70 to $1 or higher would require reversing a months-long trend towards lower and lower prices.

Beyond iBuyers, Compass also hit a new all-time low on Monday, with shares falling from an afternoon opening price of $2.25 to just over $2. They moved to around $2.10 by late afternoon, but couldn’t get out of the red.

Significantly, all of these companies were down on Monday despite global markets rising – suggesting investors have deeper doubts about real estate as an industry than they do about the market. market in general. The only major residential real estate companies that appeared to have risen with the market on Monday were Zillow and Anywhere – the latter of which spent most of Monday down but managed to stage an afternoon rally out of the red. .

Rising mortgage rates and slowing housing demand have plagued listed real estate companies for months, reducing both demand for housing-related services and investor confidence.

However, this month’s earnings season could mark the coalescence of more specific sector fears. Opendoor’s massive losses, for example, have raised new questions about how an iBuyer can survive in a market with stable or negative house price appreciation. And on Monday, analyst Mike DelPrete described Opendoor as sitting in a similar place to where Zillow occupied a year ago. In Zillow’s case, however, the company cut its losses and ditched iBuying altogether. Opendoor is currently pivoting, such as launching an asset-light marketplace, but it also can’t just ditch iBuying like Zillow did.

Helfstein’s analysis of Redfin raises similar fundamental questions about the company. Redfin is unique among large companies because it pays agents a salary rather than classifying them as independent contractors. The pitch is that this model is part of an ecosystem that makes Redfin easier, faster, and more responsive for consumers. A potential buyer can click a single button to set up a hassle-free, low-pressure home, for example.

But the model becomes more difficult to execute in lean times. In a traditional brokerage, agents usually work on commission, which means the brokerage doesn’t have to pay them even when they aren’t closing deals. This pattern can be difficult for agents, especially newer ones, who have to deal with inconsistent paychecks. But it also means that brokers don’t have high costs that stay fixed even when revenue drops.

Redfin, on the other hand, must continue to send checks to everyone on its payroll, even if they don’t enter into contracts.

For its part, Redfin told Inman on Monday it could not comment on the situation, instead pointing to its upcoming earnings report and investor call, both of which will be posted online on Wednesday. In the meantime, however, Redfin and a cohort of other property companies will have to continue to deal with investor apprehension.

Email Jim Dalrymple II

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