Over the past six months, Redfin’s shares (currently trading at $11.05) have posted a disappointing 16.6% loss while the S&P 500 was down 1.6%. This 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? See what our analysts have to say in our full research report, it’s free.
Despite the more favorable entry price, we don't have much confidence in Redfin. Here are three reasons why there are better opportunities than RDFN and a stock we'd rather own.
Why Do We Think Redfin Will Underperform?
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.
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 11,441 in the latest quarter, and over the last two years, averaged 12.2% 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. 
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 5.5% 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.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Redfin burned through $43.52 million of cash over the last year, and its $922.1 million of debt exceeds the $124.7 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Redfin’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Redfin until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We see the value of companies helping consumers, but in the case of Redfin, we’re out. After the recent drawdown, the stock trades at 54.7× forward EV-to-EBITDA (or $11.05 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.
Stocks We Would Buy Instead of Redfin
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