Redfin Confusion

If Redfin is posting high profits quarter after quarter, why did they drop 33% and continue to consistently have 5% rises and falls?

Redfin is a high-growth potential stock, meaning it will be impacted by the overall tech market sell off as interest rate risk increases. That said, I still believe strongly in the overall business case, nicely summarized below (one of the rare articles on SA that seems well grounded).

https://seekingalpha.com/article/4427590-redfin-changing-the-real-estate-game

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https://seekingalpha.com/article/4412975-redfin-down-35-lots-to-go-disruptor-fallacy

I didn’t know they paused their homebuying. From researching, they had trouble hiring agents to represent them.

The Seeking Alpha article is a rehash of an older one (hence the reliance on older data), and a few of its points are pure conjecture (particularly his conclusion points- zero support to his “numbers”).

WRT to the home flipping (RedfinNow), I actually think that it’s a strength to be using it in a limited capacity.

1 - Flipping homes en masse is a large financial risk to carry in the hope that you can sell for higher (and opens risk to unknown issues arising, markets depressing, etc). Flipping is also manpower intensive and doesnt benefit much from efficiencies of scale (too much individual attention required for each unique asset).

2 - Ties up an enormous amount of capital to own dozens, hundreds, thousands of houses at any one time - capital that could be allocated to growing the other parts of the business.

3 - Most home sellers want maximum value extraction and would be willing to trade a 1-2 month selling process in return for a 5% higher price (5% is the cut that redfin and others take on flipping). The immediate selling market is limited to those who have to sell immediately.

These 3 reasons make it doubtful that flipping will ever be a significant cash driver. Instead redfin is treating this as only one of many options availing to sellers - essentially ensuring that no matter what the customer decides redfin can provide. This helps attract and retain customers within the Redfin network.

The same can also be said for other add-on services - mortgage/title/insurance/etc, none of which will overshadow the primary business but provide value added to the customer with a streamlined “one-stop shop”. Of note, these do benefit fram economies of scale, so there is more upside here.

This is why looking at the hard numbers is so critical, because Redfin’s total revenue included the RedfinNow purchase/sale of homes - massively inflating revenue generation on small or negative margins. Thus when Redfin wisely cut back on the direct program it seemed like they took a massive revenue hit, but it really was them just not buying and selling houses at a loss, hence profit margin actually increased.

WRT to agents… Redfin did mess up by laying off a bunch of agents at the beginning of the pandemic. This did hurt growth from what could have been, but looks like they are back on track to expanding.

Good news!