Can Redfin Find Its Way to Profitability?

by | Jun 17, 2022

CEO Glenn Kelman says Redfin will post an operating profit this year. Headcount reductions are a good start.

Redfin layoffs. Real estate brokerage Redfin (RDFN) is laying off about 470 workers, or 8% of its workforce. Compass (COMP) also announced earlier this week a workforce reduction of around 10%, or 450 workers, as part of a plan to cut costs, along with reducing U.S. hiring and not filling vacant roles. Redfin CEO Glenn Kelman noted that May demand was 17% below expectations and that “mortgage rates increased faster than at any point in history. We could be facing years, not months, of fewer home sales, and Redfin still plans to thrive.” Redfin represented 1.18% of all U.S. home sales by value in the first quarter of 2022.

RDFN: Market Snapshot

Source: Boardroom Alpha

Mortgage rates have hit 6%. Recent data have demonstrated that home sales are slowing as the combination of higher mortgage rates and rising prices have cooled demand. Over the past six months, the average 30-year mortgage rate has increased from 3.1% to 6.05% as the Federal Reserve works to curb inflation. Mortgage rates are currently at their highest levels since 2008. The over 3% increase also marks the biggest upward move in mortgage rates since 1981. RDFN shares have declined 83% in the past year, versus a 13% decline for the S&P 500 over the same period.

RDFN CEO Glenn Kelman: Performance Scorecard

Source: Boardroom Alpha

Still not profitable despite expanded business model. In recent years, Redfin has expanded its business model to include mortgage, title, and escrow services as well as iBuying (Redfin will purchase your home outright and resell it). CEO Glenn Kelman indicated during the company’s Q1 2022 earnings call that Redfin will post an operating profit this year and bottom line profits in 2024. Unfortunately, the company is still burning cash; FCF was a $(201.5)M in the company’s most recently reported Q1. Redfin’s brokerage services was $168 million, but cost of revenue was $154M, generating gross margin of 13%, which hasn’t been enough to offset the company’s elevated investments in technology and marketing. Operating losses were $85M in Q1 2022.

Redfin’s iBuying business is risky and a significant operating drag. iBuying revenues were $380M in Q1 2022, or 63% of total revenue. Gross profit margin on these properties was only 5% — troubling in a peak home buying market. There’s also significant inventory and operating risk if Redfin can’t sell its inventory of homes above the prices it paid. Redfin had $245M worth of properties in its inventory as of the end of Q1. Given the sharp drop in demand, there’s a high likelihood of operating losses associated with holding this real estate portfolio over the next several quarters. Notably, Zillow Group (Z) was forced to exit the iBuying business in late 2021 despite a rising home buying market at the time.

RDFN: EBITDA and Free Cash Flow Trends

Source: Boardroom Alpha

Governance alert: Declassified board by 2025. One positive step toward good governance: Redfin will declassify its board (by 2025). Classified boards are structured so that directors come up for re-election on a staggered schedule, so that the board can’t be replaced en masse.

RDFN: Current Board

Source: Boardroom Alpha

RDFN: Proposals from June 14, 2022 annual meeting

Source: SEC filings

Heavy insider selling. Insiders sold $27.1M in stock over the past 12 months, well above sector peers. The last time Kelman purchased stock was in 2019. Both Kelman and Redfin CFO Christopher Neilsen sold stock in May.

RDFN: Insider trading summary

Source: Boardroom Alpha

Don’t think we’ve seen a bottom here yet. Kelman and the board have work to do in adjusting the business model to find a path to profitability. Headcount reductions are only a start toward getting to positive FCF. RDFN shares trade at ~3x book value. Until there is evidence in stabilizing housing demand and right-size business model, we continue to avoid RDFN shares.

<a href="https://www.boardroomalpha.com/author/joanna/" target="_self">Joanna Makris</a>

Joanna Makris

Joanna has been analyzing and investing in emerging technologies for over two decades, having led the Technology, Media, and Telecom research at several global investment banks, including Mizuho Securities and Canaccord Genuity. Navigating stock market volatility since it all began in 2000. Banjo player, artist, and frittata-maker.

More from Boardroom Alpha

SPAC Market Review – November 2022

November’s SPAC market review paints a picture of a SPAC market rushing towards the exit with high, and accelerating liquidations, more deal terminations, and almost no new SPAC IPOs.

Failed Say-on-Pay Votes 2022

The annual (sometimes) Say-on-Pay votes in 2022 highlighted discontent across a range of poor performing companies.

SPACs Today: Thursday, Dec 1

Pacifico Acquisition Corp. (PAFO) are the latest with high redemptions, and the rest of today’s SPAC market news.

Get it In Your Inbox

Subscribe to Boardroom Alpha's research to receive the latest on governance, SPACs, and people.


Know Who Drives Return

Objective, data-driven assessments for every public company director and officer.

SPAC Analytics & Database

Comprehensive research and analytics on every SPAC, sponsor, and deal. Real-time alerts, yields, red flags, filings, investors, and much more. API access to institutional grade SPAC database.

Disclaimer

The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but Boardroom Alpha cannot guarantee its accuracy and completeness, and that of the opinions based thereon. 

This report contains opinions and is provided for informational purposes only – it does not constitute investment, legal or tax advice. You should not rely solely upon the research herein for purposes of transacting securities or other investments, and you are encouraged to conduct your own research and due diligence, and to seek the advice of a qualified securities professional before you make any investment.  

None of the information contained in this report constitutes, or is intended to constitute a recommendation by Boardroom Alpha of any particular security or trading strategy or a determination by BA that any security or trading strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.  

No representation or warranty, expressed or implied, is made on behalf of Boardroom Alpha as to the accuracy or completeness of the information contained herein. Boardroom Alpha does not accept any liability for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on all or any part of this research and any liability is expressly disclaimed.