By Sam Boughedda
Oppenheimer downgraded Redfin (NASDAQ:RDFN) to Underperform with a $1.30 Target in a note to clients on Monday, stating the company is "poorly positioned" for a declining housing market.
"We believe Redfin's core business is fundamentally flawed with fixed-cost model for agents vs. 100% commission for industry," said Oppenheimer analysts. "This prevents RDFN from optimizing margins when housing markets decline and prevents share gains when markets rebound, lagging markets by 6–12 months, such as in '20."
The analysts added that with Fannie Mae forecasting U.S. existing home sales declining 18% y/y in '22 and 22% in '23, they estimate it will take two years for housing demand to return to meaningful growth.
In addition, they explained that with the 30-year fixed mortgage now at 7.3%, they believe the company will not be able to properly leverage costs in a lower-demand environment and that the majority of its other businesses are either leveraged to home purchases (Tile & Mortgage) or will see lower demand from reduced consumer spending (Rentals).
"RDFN has $1.23B in net debt, with $661M '25 convertible note that will need refinancing in late-'23 to mid-'24 & will struggle to reach positive FCF. $1.30 SOTP target implies 3.7x' 23E GP vs. peers at 3.1x and ZG at 3.4x; therefore, we are downgrading shares to Underperform," they concluded.