Redfin (NASDAQ: RDF) is a real estate technology company and operates one of the largest brokerages in America. The rapid rise in interest rates in 2022 and 2023 shrank the borrowing capacity of most consumers and slowed the real estate market, ruining Redfin’s core business.

Nevertheless, the company continues to report modest revenue growth. It is using this difficult time to cut costs and right-size its business, which has significantly improved its bottom line.

This hasn’t stopped Redfin stock from plunging. It now trades 92% below its all-time high. It’s hit a low by any widely-used measure, and with the Federal Reserve expected to cut interest rates in September, this could be a golden buying opportunity for investors.

Redfin makes the best of a difficult situation

Redfin’s largest source of revenue used to be RedfinNow, an iBuying company that bought homes directly from willing sellers and tried to resell them for a profit. The company shut down the segment in 2022 to avoid losses on its housing inventory when interest rates soared. Redfin is now focusing on its portfolio of services, which includes brokerage services, mortgages and closing services.

In the most recent second quarter of 2024 (which ended June 30), Redfin and its 1,719 principal agents represented 0.77% of all home sales in the U.S., up from 0.75% in the same period last year. The company also achieved a 28% mortgage retention rate, the share of customers who used Redfin to purchase And finance their own home.

Redfin has designed its business model to sell a large number of homes and gain market share. It charges an attractive listing fee of just 1.5%, which is much lower than the usual 2.5% fee in the rest of the industry. Additionally, repeat customers are charged just 1%, and the company said they accounted for 37% of all sales in the second quarter.

Redfin’s revenue for the second quarter was $295.2 million, up 7% from the same quarter last year. This was a great result considering that existing home sales in the U.S. actually rejected during the same period, further demonstrating Redfin’s growing market share. In addition, the company broke even on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, a big improvement over the $6.9 million EBITDA loss it suffered in the year-ago quarter.

Redfin has improved its profitability by cutting costs. Earlier this year, the company launched Redfin Next, an opt-in program for agents who want to receive higher commissions in exchange for salary sacrifice. This removes fixed personnel costs from Redfin’s books and allows the company to hire more agents to increase its market share with virtually no upfront costs. The Next program will be available to all of the company’s agents next year.

The story continues

The Fed could cut interest rates three times by the end of 2024

Higher interest rates have shaken up the housing market. I’ve already mentioned the decline in existing home sales in the U.S., but now I want to highlight the magnitude. Existing home sales in June (the most recent number) totaled 3.89 million annualized units, down a whopping 41% from the recent high of 6.6 million annualized units in 2021.

The Consumer Price Index (CPI), which measures inflation, reached a 40-year high of 8% in 2022. For this reason, the Fed aggressively raised the benchmark interest rate from a historic low of 0.25% to 5.50% in just 16 months (between March 2022 and July 2023).

However, recent data show that the consumer price index has cooled to 3%, well nearing the Fed’s target of 2%. For this reason, experts are predicting that interest rate cuts are imminent. In fact, according to the CME GroupAccording to the FedWatch tool, there could be up to three cuts by the end of 2024 (in September, November and December).

This will help the real estate market in two ways:

1. This increases consumers’ creditworthiness, giving them greater purchasing power.

2. It offers incentives to existing homeowners who want to sell but don’t want to give up their current low fixed rate. This could lead to more offers and increase the housing supply.

Both factors will lead to more real estate transactions, which is great for Redfin’s business.

Redfin stock is trading at a rock-bottom price

The price-to-sales ratio (P/S) is a popular method for valuing companies that do not generate consistent earnings (profits). It is calculated by dividing a company’s market capitalization by its annual sales.

Redfin has a market cap of $901 million at the time of this writing. So, based on $1 billion in revenue over the past 12 months, its stock is trading at a price-to-earnings ratio of less than 0.9. In other words, investors are valuing Redfin at less than a single year’s worth of revenue, which is effectively rock bottom.

For comparison, that’s well below Redfin’s peak P/S ratio of nearly 10 in 2021 and also below the average P/S ratio of 2.6 since 2017, when the company first went public.

In my opinion, the low valuation may be unjustified, as Redfin’s business is improving by most measures. Additionally, the company has a stable cash balance of $201 million and has another $208 million in loans (mortgages) that it plans to sell. Considering that the company expects to break even on an adjusted EBITDA basis this year, it is unlikely that it will surprise investors with a request for fresh capital via a capital raise any time soon.

This could be an opportunity for investors. The FedWatch tool predicts a 100% probability of a rate cut in September, so it might be a good idea to buy Redfin shares by then, with the intention of holding them for the long term to benefit from the housing market recovery.

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Anthony Di Pizio does not own any of the stocks mentioned. The Motley Fool owns a position in Redfin and recommends it. The Motley Fool recommends CME Group and recommends the following options: short August 2024 $11 calls on Redfin. The Motley Fool has a disclosure policy.

1 Super Stock Down 92% to Buy in Bulk Before September was originally published by The Motley Fool