Online real estate firm Redfin Corp. (NASDAQ: RDFN) has tremendous competition from larger companies, including Zillow, Realtor.com and Trulia. Its shares recently fell over 10% to $3.63. One reason was that Oppenheimer cut its share price target to $1.30. It could go much lower than that.
Oppenheimer commented, “We believe that Redfin’s business is fundamentally flawed, as the company continues to use a fixed-cost model for agents.” Put another way, its business model is not adaptable to the current real estate market in which interest rates are rising and home sales are falling.
The news was another in a line of triggers for stockholder trouble. Redfin shares are off 90% this year. Not only have housing sales slowed, but that will continue because of 7% mortgage rates. Based on the Federal Reserve’s rate decisions, this number could jump to 8% or higher. Real estate agents may find that, for the first time in over two years, they have few clients who want to buy a new home.
Redfin does not have to scale to protect it from a soft real estate market. It is about to release earnings. They may be as bad or worse than the prior quarter’s figures. Furthermore, the earlier quarter was posted when the real estate market was on fire. Revenue for the period was $610 million. However, the cost of revenue was $489 million. Redfin lost $78 million. Those figures will be worse going forward, based on trends in the real estate market.
Redfin’s share of the national market is tiny. It ran 0.82% for sales of existing homes in the second quarter. That is not nearly enough to support a viable business.
Oppenheimer believes that the shares will drop to $1.30. If financial results for Redfin continue to crater, the figure will drop well below that.
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