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Redfin (NASDAQ:RDFN) Misses Q4 Sales Targets


Full Report / February 27, 2024

Real estate technology company Redfin (NASDAQ:RDFN) missed analysts' expectations in Q4 FY2023, with revenue down 54.5% year on year to $218.1 million. On the other hand, the company expects next quarter's revenue to be around $218.5 million, in line with analysts' estimates. It made a GAAP loss of $0.20 per share, improving from its loss of $0.42 per share in the same quarter last year.

Redfin (RDFN) Q4 FY2023 Highlights:

  • Revenue: $218.1 million vs analyst estimates of $220.3 million (1% miss)
  • EPS: -$0.20 vs analyst estimates of -$0.21 (5.1% beat)
  • Revenue Guidance for Q1 2024 is $218.5 million at the midpoint, roughly in line with what analysts were expecting
  • Adjusted EBITDA Guidance for Q1 2024 is ($32.5) million loss at the midpoint, below expectations of a ($21.2) million loss
  • Free Cash Flow was -$37.49 million, down from $99.52 million in the previous quarter
  • Gross Margin (GAAP): 33.5%, up from 7.8% in the same quarter last year
  • Brokerage Transactions: 10,152 (slight beat vs. expectations of 10,135)
  • Market Capitalization: $789.4 million

Founded by a former medical school student, electrical engineer, and Amazon data engineer, Redfin (NASDAQ:RDFN) is a real estate company offering brokerage services through an online platform.

At the heart of Redfin's business model is its integrated platform, which leverages big data analytics and a user-friendly interface to provide consumers with a comprehensive real estate search tool. This platform offers extensive listings, detailed home information, and valuable market insights. Redfin’s website and mobile apps attract millions of visitors, making it one of the preeminent real estate websites in the United States.

Redfin utilizes a unique pricing model; unlike traditional brokerages that charge a standard commission, Redfin employs a low-fee model, charging sellers a lower commission and offering a rebate to buyers. This cost-effective approach enabled it to win market share in the past.

The company's agents benefit from the platform's technology, receiving a steady stream of leads and data-driven insights, which allows them to serve clients more efficiently. Redfin agents are paid a salary and bonuses based on customer satisfaction, aligning their interests with those of their clients and fostering a culture of high-quality customer service.

In addition to home buying and selling services, Redfin provides mortgage, title, and settlement services, offering an end-to-end solution for real estate transactions.

Real Estate Services

Technology has been a double-edged sword in real estate services. On the one hand, internet listings are effective at disseminating information far and wide, casting a wide net for buyers and sellers to increase the chances of transactions. On the other hand, digitization in the real estate market could potentially disintermediate key players like agents who use information asymmetries to their advantage.

Redfin’s primary competitors include Zillow (NASDAQ:ZG), Realogy Holdings (NYSE:RLGY), eXp World (NASDAQ:EXPI), and Opendoor Technologies (NASDAQ:OPEN).

Sales Growth

Examining a company's long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Redfin's annualized revenue growth rate of 17.5% over the last five years was solid for a consumer discretionary business. Redfin Total RevenueWithin consumer discretionary, a long-term historical view may miss a company riding a successful new product or emerging trend. That's why we also follow short-term performance. Redfin's recent history shows a reversal from its five-year trend, as its revenue has shown annualized declines of 24.8% over the last two years.

We can dig even further into the company's revenue dynamics by analyzing its number of brokerage transactions and partner transactions, which clocked in at 10,152 and 3,186 in the latest quarter. Over the last two years, Redfin's brokerage transactions averaged 20.2% year-on-year declines while its partner transactions averaged 7.6% year-on-year declines. Redfin Brokerage Transactions

This quarter, Redfin missed Wall Street's estimates and reported a rather uninspiring 54.5% year-on-year revenue decline, generating $218.1 million of revenue. The company is guiding for a 32.9% year-on-year revenue decline next quarter to $218.5 million, an improvement from the 45.5% year-on-year decrease it recorded in the same quarter last year. Looking ahead, Wall Street expects revenue to decline 2.9% over the next 12 months.

Operating Margin

Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Given the consumer discretionary industry's volatile demand characteristics, unprofitable companies should be scrutinized. Over the last two years, Redfin's high expenses have contributed to an average operating margin of negative 17.3%. Redfin Operating Margin (GAAP)

In Q4, Redfin generated an operating profit margin of negative 20.3%, up 4.4 percentage points year on year.

Over the next 12 months, Wall Street expects Redfin to shrink its losses but remain unprofitable. Analysts are expecting the company’s LTM operating margin of negative 20.4% to rise to negative 11.5%.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability and efficiency of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions. Redfin EPS (GAAP)

Over the last five years, Redfin's EPS dropped 132%, translating into 18.3% annualized declines. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends or consumer preferences. Consumer discretionary companies are particularly exposed to this, leaving a low margin of safety around the company (making the stock susceptible to large downward swings).

In Q4, Redfin reported EPS at negative $0.20, up from negative $0.42 in the same quarter a year ago. This print beat analysts' estimates by 5.1%. Over the next 12 months, Wall Street expects Redfin to improve its earnings losses. Analysts are projecting its LTM EPS of negative $0.69 to advance to negative $1.06.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Over the last two years, Redfin has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 1.9%, subpar for a consumer discretionary business.

Redfin Free Cash Flow Margin

Redfin burned through $37.49 million of cash in Q4, equivalent to a negative 17.2% margin. This caught our eye as the company shifted from cash flow positive in the same quarter last year to cash flow negative this quarter. Over the next year, analysts predict Redfin's cash profitability will improve. Their consensus estimates imply its LTM free cash flow margin of 4.1% will increase to 46.4%.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).

Redfin's five-year average return on invested capital was negative 28.3%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.

Key Takeaways from Redfin's Q4 Results

It was encouraging to see Redfin slightly top analysts' EPS expectations this quarter. On the other hand, its brokerage transactions unfortunately missed and its revenue fell short of Wall Street's estimates. Guidance was also mixed, with Q1 2024 revenue guidance in line with expectations but adjusted EBITDA guidance below, showing lower margins than Wall Street is estimating. Overall, this was a mixed quarter for Redfin. The stock is up 1.1% after reporting and currently trades at $7.24 per share.

Is Now The Time?

When considering an investment in Redfin, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We cheer for all companies serving consumers, but in the case of Redfin, we'll be cheering from the sidelines. Although its revenue growth has been good over the last five years, its number of partner transactions has been disappointing. On top of that, its declining EPS over the last five years makes it hard to trust.

While we've no doubt one can find things to like about Redfin, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

Wall Street analysts covering the company had a one-year price target of $7.77 per share right before these results (compared to the current share price of $7.24).

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