What happened
Shares of Redfin (RDFN -8.09%), an online real estate brokerage, were plunging this morning after an analyst downgraded the company's stock and said that Redfin's business is "fundamentally flawed."
Unsurprisingly, some investors quickly hit the sell button this morning, sending Redfin's shares down 13.1% as of 10:39 a.m. ET.
So what
Oppenheimer analyst Jason Helfstein downgraded Redfin's stock to underperform (essentially a sell recommendation) from perform and put a price target on its stock of just $1.30.
Image source: Getty Images.
Helfstein made some strong comments in an investor note about the company, saying, "We believe Redfin's core business is fundamentally flawed with fixed-cost model for agents versus 100% commission" for the industry.
The analyst believes that this hurts Redfin's business because it prohibits the company from optimizing margins when the housing market declines and prevents gains when it rebounds.
Making matters worse is the fact that Helfstein doesn't expect a real estate rebound any time soon.
"Similar to the recovery after the 2001 crash, we estimate that it will take about two years for housing demand to return to meaningful growth, as interest rates potentially decrease in 2024," he wrote.
He also noted that Redfin "will struggle to reach positive free cash flow."
Now what
Helfstein's comments and downgrade for Redfin's stock come just two days before the company reports its third-quarter results.
The consensus estimate among analysts is for Redfin to report a non-GAAP (adjusted) loss per share of $0.80 in the quarter, far below its loss of $0.20 in the year-ago quarter.
With the analyst cutting Redfin's stock rating and questioning the company's business model amid a tough time in the real estate market, it's no surprise to see Redfin's shares falling hard today.
Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Redfin. The Motley Fool recommends the following options: short November 2022 $17 calls on Redfin. The Motley Fool has a disclosure policy.
November 07, 2022 at 10:55PM
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Why Redfin Stock Is Falling Hard Today - The Motley Fool
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