Redfin stock tanks after forecast shows losses expanding as iBuying business grows

Analysts on average expected Redfin to report losses of 31 cents a share on sales of $599 million, according to FactSet. Redfin RDFN, -6.13% shares, however, dove to less than $26 in the extended session, after closing with a 6.1% loss at $28.64.

The decline was likely tied to Redfin’s forecast, which called for a first-quarter loss of $115 million to $125 million, more than the company lost in the entire 2021 calendar year, $109.6 million. Last year in the first quarter, historically the slowest quarter for the company on both the top and bottom lines, Redfin lost $38.1 million, and analysts on average were expecting a loss of $75 million heading into the print.

Redfin executives guided for first-quarter revenue of $535 million to $560 million, with the bulk coming from its “Properties” division, which they expect to collect $330 million to $350 million in revenue. That division, which is almost entirely made up of iBuying, produced record revenue of $377.1 million in the quarter, up from less than $40 million in the fourth quarter of 2020.

Redfin has maintained an iBuying business, which flips homes and tends to boost revenue while being a drag on the bottom line. Rival Zillow Inc. Z, -2.09% ZG, -1.71% decided to drop its iBuying business after buying thousands of homes that were underwater last year.

Opinion: Zillow thought it could rule the housing market. It was very wrong.

Redfin Chief Executive Glenn Kelman was forceful in comments three months ago, after the Zillow disaster first came to light, that his company would continue with its iBuying plans. In a statement Thursday, he praised the effort’s gross profit.

“Redfin is broadening its sources of customer value and corporate income, with title, mortgage and iBuying now on track to generate gross profits, after years of being subsidized by our brokerage,” he said in the announcement. “Entering an uncertain market, Redfin’s pricing power and on-demand service will let us take share and improve operating margins.”

In a conference call Thursday, Kelman boasted more about the business, saying, “We’ve been more successful buying homes at profitable prices because there are fewer iBuyers bidding against us,” but admitted that Redfin was paying higher prices later in the year.

“We are still more active in coastal markets and other iBuyers buying older homes in more expensive neighborhoods. We have so far earned higher gross profits from these homes albeit at a lower margin,” he said. “Starting in December, we significantly raised our offer prices in anticipation of low inventory for the opening three months of the home-buying season, a decision that seems likely to pay off.”

See also: America’s most popular housing markets have an inflation problem

Redfin disclosed that it sold a record 600 homes in the quarter for average revenue of $622,251 apiece, and that gross profit in the business was less than $4 million. Redfin did not disclose a net loss in the business, though it did disclose that the company’s total interest expense was roughly the same total as the gross profit of the company’s “Properties” division: $3.96 million in gross profit vs. $3.94 billion in interest expense.

In the call, executives suggested that losses were rising because of the acquisition of RentPath, a bankrupt and money-losing business that was acquired last summer, as well as an increase in hiring.

“We’ve had to hire more agents than usual — 23% of our lead agents have joined Redfin since Oct. 1, which is nearly as much as the whopping 25% in 2021,” Kelman said. “As these agents guide customers through their monthslong home search, the gains we expect from better customer service and market share and gross profit will come in the second half of 2022.”

Redfin stock has struggled since Zillow’s iBuying business imploded, falling 24.7% in the past three months as the S&P 500 index SPX, -2.12% has declined 4.6%. Zillow shares have actually increased in that time frame by 4%, thanks to a boost after the company detailed its post-iBuying path last week.