Insights

Why Redfin Stock Sank Today

What happened 

Shares of Redfin (NASDAQ: RDFN) fell 6.7% on Tuesday, following bearish analyst commentary. 
So what 

Piper Sandler analyst Thomas Champion slashed his rating on Redfin’s stock from overweight (expected to do well in the future) to underweight (expected to do poorly in the future). He now sees the real estate services company’s share price falling roughly 10% to $11. That’s down from his previous forecast of $40 per share.
Surging house prices have made buying a home significantly less affordable. At the same time, the Federal Reserve has signaled its intent to raise interest rates to tame inflation. That’s driven mortgage rates above 5% — the highest they’ve been in more than a decade. 

Image source: Getty Images.

Together, these trends are likely to weigh on demand for real estate services. Champion, in turn, thinks Wall Street’s growth projections for Redfin are too high. Though analysts, on average, estimate that the company’s real estate services will increase by 9% in 2022 and 16% in 2023, Champion warns that Redfin could struggle with negative growth during this time. 
Thus, Champion expects Redfin to generate an earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $53.4 million in 2022. Additionally, he fears that Redfin could struggle to integrate its recent acquisitions, including mortgage lender Bay Equity Home Loans and rental site RentPath, which could exacerbate its profitability issues. 
Now what
Redfin’s low-cost brokerage services provide it with a powerful competitive advantage in the $43 trillion U.S. housing market. Yet, although Redfin’s market share is growing, if housing sales slow, its own growth could also be stunted.
Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns and recommends Redfin. The Motley Fool recommends the following options: long May 2022 $22 calls on Redfin, short May 2022 $26 calls on Redfin, and short May 2022 $28 calls on Redfin. The Motley Fool has a disclosure policy. –

What happened 

Shares of Redfin (NASDAQ: RDFN) fell 6.7% on Tuesday, following bearish analyst commentary. 

So what 

Piper Sandler analyst Thomas Champion slashed his rating on Redfin’s stock from overweight (expected to do well in the future) to underweight (expected to do poorly in the future). He now sees the real estate services company’s share price falling roughly 10% to $11. That’s down from his previous forecast of $40 per share.

Surging house prices have made buying a home significantly less affordable. At the same time, the Federal Reserve has signaled its intent to raise interest rates to tame inflation. That’s driven mortgage rates above 5% — the highest they’ve been in more than a decade. 

Image source: Getty Images.

Together, these trends are likely to weigh on demand for real estate services. Champion, in turn, thinks Wall Street’s growth projections for Redfin are too high. Though analysts, on average, estimate that the company’s real estate services will increase by 9% in 2022 and 16% in 2023, Champion warns that Redfin could struggle with negative growth during this time. 

Thus, Champion expects Redfin to generate an earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $53.4 million in 2022. Additionally, he fears that Redfin could struggle to integrate its recent acquisitions, including mortgage lender Bay Equity Home Loans and rental site RentPath, which could exacerbate its profitability issues. 

Now what

Redfin’s low-cost brokerage services provide it with a powerful competitive advantage in the $43 trillion U.S. housing market. Yet, although Redfin’s market share is growing, if housing sales slow, its own growth could also be stunted.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns and recommends Redfin. The Motley Fool recommends the following options: long May 2022 $22 calls on Redfin, short May 2022 $26 calls on Redfin, and short May 2022 $28 calls on Redfin. The Motley Fool has a disclosure policy.

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