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On Monday, Goldman Sachs revised its rating for Redfin Corp. (NASDAQ:RDFN) stock, downgrading the online real estate brokerage from Neutral to Sell. The firm also adjusted Redfin's price target to $6.50, a slight increase from the previous $6.00 target. The adjustment comes amid concerns over the company's valuation and market challenges that could impact its financial performance.
The downgrade was influenced by Redfin's stock performance, which saw a 22% increase over the trailing twelve months (TTM) as of November 15, 2024. Despite this, the stock is currently trading at a high 88 times its estimated 2025 enterprise value to EBITDA (EV/EBITDA), which is significantly above its peers like CoStar Group (NASDAQ:CSGP) at 14 times and Zillow Group (NASDAQ:ZG) at 25 times. Goldman Sachs believes that this premium valuation is unwarranted given the potential headwinds facing the company.
One of the key concerns raised was the stagnant state of U.S. existing home sales, which were at a seasonally adjusted annual rate (SAAR) of 3.84 million as of September 2024. Affordability issues, driven by mortgage rates, home prices, and income levels, are expected to hinder the housing market recovery. This poses a risk to consensus EBITDA forecasts, including Fannie Mae (OTC:FNMA)'s projection of 4.5 million U.S. existing home sales for 2025.
Additionally, increasing pressure on agent commissions is anticipated to impact Redfin's revenue from commissions, either by reducing its take-rate or by diminishing its competitive edge as other companies lower their rates. The report also highlighted a potential decline in Real Estate Services gross margins for Redfin.
Despite the positive contributions from Redfin Next (LON:NXT) to the company's top-line growth, Goldman Sachs expressed concerns over rising personnel costs, as indicated by the last two quarters' performances. The firm anticipates that the challenging U.S. housing market conditions could lead to higher hiring expenses.
Lastly, the analyst report pointed out the improving industry backdrop for U.S. rental advertising platforms, driven by rising vacancy rates. However, Zillow's strong performance in the rental market this year was noted as a potential competitive threat to Redfin's rental business, adding to the list of challenges the company may face.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on Redfin's financial situation, aligning with Goldman Sachs' concerns. The company's market capitalization stands at $1.04 billion, with a revenue of $1.02 billion for the last twelve months as of Q3 2024. Despite a modest revenue growth of 3.7% over this period, Redfin's financial health remains precarious.
InvestingPro Tips highlight that Redfin "may have trouble making interest payments on debt" and is "not profitable over the last twelve months." These insights corroborate Goldman Sachs' cautious stance on the company's financial outlook. The stock's recent performance has been volatile, with a 15.03% decline in the past week and a 25.47% drop over the last month, reflecting market unease about Redfin's prospects in a challenging housing market.
Interestingly, Redfin is trading at a low revenue valuation multiple, which could be seen as an opportunity by some investors. However, this should be weighed against the company's negative earnings and the analysts' expectations that Redfin will not be profitable this year.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips on Redfin, providing a deeper understanding of the company's financial position and market challenges.
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