Story Stocks^®

Online real estate brokerage company Redfin (RDFN) is trading deeply in the red today after issuing a disappointing Q2 earnings report that included a 55% plunge in revenue and its first market share loss since going public in 2017. That market share loss, combined with weaker-than-expected close rates on home sales, factored into RDFN's downside Q3 revenue guidance and its decision to rein in its profitability forecast for FY23.

• Previously, RDFN projected that it would break even on an adjusted EBITDA basis in 2023. Now, however, the company expects to achieve positive adjusted EBITDA status on a trailing 12-month basis in 1H24.

The headwinds that RDFN is facing are both company-specific and macroeconomic in nature.

• On the former point, agent layoffs and the closure of RedfinNow -- the company's business that purchased homes directly from sellers -- caused the company to lose eight basis points of market share.
  • Following the layoffs, RDFN had to reassign about a third of its active customers to different agents, slowing the closing process. With the closure of RedfinNow, the company lost about 12% of its listing demand.
• On the latter point, higher mortgage rates and very low existing home inventory levels compounded the problem. CEO Glenn Kelman succinctly summed up the situation, commenting that "sales volumes are near rock bottom" with July's yr/yr drop in active listings representing the largest drop in nearly 18 months.

It's not all doom and gloom for RDFN, though.

• As customers become more comfortable with higher mortgage rates and as RDFN ramps up its recruiting and retains more productive agents, Mr. Kelman expects that the company's close rates will return to historical norms.
  • For some context, from 2017-2022, between 6.3% and 7.2% of customers who contracted with RDFN or its partner agents had closed on their sale by this point in the year. In 2023, that figure has slipped to 5.5%.
• Additionally, while its disappointing that RDFN scratched its expectation of reaching positive adjusted EBITDA this year, the company is still forecasting a significant improvement in profitability. Specifically, RDFN guided for adjusted EBITDA of ($45) mln compared to ($185) in 2022 with similar gains anticipated in the coming years.

Overall, though, it was a discouraging and surprisingly weak earnings report for RDFN as the company's competitive standing took a hit in a challenging real estate market.