Mr. Market is buying Redfin Corporation (NASDAQ: RDFN) shares because American housing is bubbling.
Month-over-month existing-home sales in all major reasons of the United States grew by 12.3% between April 2020 and April 2021, the National Association of Realtors (NAR) estimates. Similarly, the median existing homes sales price in the United States rose by 17.2% between March 2020 and March 2021. Similarly, the median existing single family home price in the United States rose by 18.4% in the same period.
Conversely, existing home home sales in the United States fell by 3.7% between February 2021 and March 2021, the NAR estimates. Thus real estate prices are exploding as home sales fall.
I think home sales rose because of COVID-19. Home sales are falling because people are spending less time at home as quarantine eases.
How Redfin Makes Money
Investors hope Redfin (RDFN) can cash in on the real-estate bubble because it is a discount online brokerage. Redfin tries to drive real estate sales with low listing fees. Redfin makes money by charging a 1% or 1.5% listing fee.
Accordingly, Redfin’s share price rose from $25.89 on 18 May 2020 to $51.14 on 14 May 2021. They often list Redfin as a trending stock.
On the other hand, Redfin is not making money from its business. Redfin reported a quarterly operating loss of -$34.51 million on 31 March 2021. The quarterly operating loss shrank from -$57.43 million on 31 March 2020.
Redfin is a Growing Company
In contrast, Redfin (NASDAQ: RDFN) reported a quarterly gross profit of $42.36 million on 31 March 2021. The quarterly gross profit grew from $12.88 million on 31 March 2020.
Redfin, however, is a growing company. Stockrow estimates Redfin’s revenues grew by 40.48% in the quarter ending on 31 March 2021. In contrast, Redfin’s revenues grew by 73.41% in the quarter ending on 31 March 2020.
Consequently, Redfin’s quarterly revenues grew from $191 million on 31 March 2020 to $268.32 million on 31 March 2021. Thus you can say Redfin is a growing company.
Redfin burns Cash
Redfin (RDFN) is burning cash. It reported a negative quarterly operating cash flow of -$50.77 million n 31 March 2021.
Similarly, Redfin is borrowing enormous amounts of money. Redfin reported a quarterly financing cash flow of $457.56 million on 31 March 2021. The quarterly financing cash flow fell from $546.13 million on 31 December 2020. Thus Redfin borrowed $1.004 billion in the last two quarters.
Overall, Redfin’s total debt grew from $242 million on 31 March 2020 to $1.226 billion on 31 March 2021. Thus, Redfin added around $1 billion in debt in the last year.
Consequently, Redfin’s quarterly ending cash flow rose from $230.71 million on 31 March 2020 to $1.343 billion on 31 March 2021. Unfortunately, most of the money came from borrowing.
What Value Does Redfin Have?
Redfin (NASDAQ: RDFN) offers a little value. Redfin reported $1.484 billion on 31 March 2021. The cash and shorter-term investments rose from $306 million on 31 March 2020.
Additionally, Redfin’s associates grew from $595 million on 31 March 2020 to $1.817 billion on 31 March 2021. Thus, Redfin gained a lot of value during the pandemic. Problematically, Redfin got that value by borrowing money.
Consequently, I think Mr. Market overvalued Redfin at $51.56 on 19 May 2021. I consider Redfin overvalued because it loses money and needs to borrow money to grow.
Therefore, I think investors need to avoid Redfin because Mr. Marke overvalues the stock, and it has a low margin of safety. The margin of safety is low because Redfin has taken enormous amounts of debt it cannot pay.