2 Growth stocks take a hit from shrinking real estate market

Technology-driven real estate company redfin (RDFN 16.47%) When OfferPad Solution (OPAD -2.23%) We just reported our second quarter 2022 results. Both companies are growing, and investors could have always reacted more positively to those numbers.

But now, as the Federal Reserve attempts to tackle the highest inflation in 40 years, interest rates are rising rapidly. This has left people worried that property prices could deteriorate for the foreseeable future, with both Redfin and Offerpad reporting clear weakness in certain segments of the housing market during the second quarter. I warned you.

Shares of Redfin and Offerpad are down more than 89% from their all-time highs. But is this a long-term buying opportunity? Let’s take a closer look at these two stocks.

1. Redfin: Prepare for the worst

Redfin CEO Glenn Kelman told investors the housing market deteriorated in the second quarter, but the company has been preparing for this since early 2022. Purchases to create a more resilient business. In addition, we are cutting costs across the board, including by reducing staff.

Redfin has created a level of scale in the real estate brokerage industry where listing fees can be charged as low as 1%. At the company, he has 2,640 principal agents, covering his 94% of the US population.

Despite the challenging environment, Redfin increased its US pre-owned home sales share to 0.82% (unit sales basis) in the second quarter, up from 0.77% in the same period last year. As a result, the company took his $606 million in revenue in the second quarter, up 29% year over year.

That was a strong result, but Redfin’s guidance for the third quarter was very soft, pointing to a possible decline in earnings compared to the second quarter, and dismissing the idea that the housing market is softening. further reinforced.

However, there have been some very positive contributions from Redfin’s smaller segment. The number of his Redfin homebuyers who took out a Redfin mortgage almost doubled year-over-year to 15%. And since the company completed his April acquisition of lender Bay Equity, Redfin’s mortgage numbers have only accelerated.

Still, the soft housing market has taken a hit. Redfin says he has lost $168 million so far in 2022. That’s an increase of more than $100 million compared to the same period last year. The company has invested aggressively in growth and expansion over the past two years, but it may not be profitable until the real estate market returns to strength.

But from an investment perspective, Redfin’s current market valuation is $1.1 billion, but analysts expect the company to generate more than $2.4 billion in revenue for the full year. That’s a pretty big gap, and if Redfin manages to limit its net loss, the stock could go much higher in the long run.

2. Offer Pad: Last-Minute Loss Avoidance

Offerpad is a specialist in iBuying (also known as direct buying). The company aims to buy thousands of homes directly from desired sellers, renovate them, and resell them at a profit. All this within 100 days. This is typically a high-risk business model that requires a lot of capital and can suffer big losses if the broader real estate market crashes.previous industry leader Giraud Group I learned it the hard way.

But Offerpad claims it gains an advantage from being selective in the markets it operates in, combined with a quick-flip strategy that limits the impact of house price fluctuations. Confident in its ability to grow, even in the face of a challenging environment, the company will expand its footprint by 33% in 2022, serving 1,800 towns and cities in 28 US markets.

OfferPad’s second quarter revenues were $1.08 billion, an increase of 185% compared to the same period last year. The company’s total revenue for the first half of 2022 will be $2.4 billion, which is 270% higher than his first half of 2021 revenue.

Offerpad was able to maintain profitability throughout the year despite a softening property market. Net income for the second quarter was $11.5 million, so the margin of error is very tight at this point.

Despite a strong year-to-date, the party may (at least temporarily) come to an end. The company expects just $800 million in revenue in the third quarter, which means it expects a significant drop in demand from homebuyers in the coming months.

Like Redfin, Offerpad is expanding into other verticals to diversify its business. There are mortgage segments and seller solutions for people who want to list the traditional way, but who also benefit from Offerpad’s home prep and renovation expertise.

We don’t know when the real estate slump will end, and with nearly $1.3 billion in inventory on Offerpad’s balance sheet, it could be exposed if house prices drop significantly from here. The company has navigated the market well so far, but investors should wait to see how things unfold over the next two quarters before taking positions in Offerpad shares to minimize potential risk. You may want to observe what you do.

Anthony Di Pizio has no positions in any of the mentioned stocks. The Motley Fool has positions in and recommends Offerpad Solutions Inc, Redfin, Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool US Headquarters recommends the following options: His August 2022 Short His $13 Call on Redfin. The Motley Fool’s U.S. headquarters has a disclosure policy.

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