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2 Growth Stocks Taking a Hit From the Dwindling Real Estate Market | The Motley Fool

Technology-driven real estate companies Redfin (RDFN 16.47%) and Offerpad Solutions (OPAD -2.23%) just reported their financial results for the second quarter of 2022. Both companies delivered growth, and at any other time, investors might have reacted more positively to their numbers. 

But right now, interest rates are rapidly increasing as the Federal Reserve attempts to fight a 40-year high in inflation. That has people worried real estate prices could deteriorate for the foreseeable future, and both Redfin and Offerpad warned of clear weakness in certain segments of the housing market during the second quarter.

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

1. Redfin: Prepared for the worst

Redfin CEO Glenn Kelman told investors the housing market took a turn for the worse in the second quarter, but the company has been preparing for this since the beginning of 2022. It has focused on diversifying its product and service offerings beyond real estate brokering and direct buying to create a more resilient business. In addition, it has been cutting costs across the board, including by trimming its workforce.

Redfin has created a level of scale in the real estate brokering industry that allows it to charge listing fees as low as 1%, which significantly undercuts smaller, independent firms, which typically charge around 2.5%. The company has 2,640 lead agents, and its coverage spans 94% of the U.S. population.

Despite the difficult conditions, Redfin still managed to increase its share of U.S. existing home sales to 0.82% (by units sold) in the second quarter, up from 0.77% in the year-ago period. As a result, the company generated $606 million in revenue during Q2, a year-over-year jump of 29%.

It was a strong result, but Redfin’s guidance for the third quarter was quite soft, pointing to the possibility that it could see a drop in revenue compared to the second quarter, further reinforcing the idea that the housing market is softening. 

But there were some very positive contributions from Redfin’s smaller segments. The number of Redfin homebuyers who got a Redfin mortgage nearly doubled year over year to 15%. And since the company closed its acquisition of lender Bay Equity in April, the number of home loans Redfin writes will likely only accelerate. 

Still, the softer housing market is taking its toll. Redfin has lost $168 million so far in 2022, which was an increase of more than $100 million compared to the same period last year. The company had invested aggressively in growth and expansion over the last two years but may not see a return now until the real estate market firms up again. 

But from an investment perspective, Redfin’s market valuation stands at $1.1 billion at the moment, yet analysts expect the company will generate over $2.4 billion in revenue for the current full year. That’s quite a disparity, and if Redfin can get its net losses under control, there could be a significant upside to its stock over the long term. 

2. Offerpad: Narrowly avoiding losses

Offerpad is an iBuying specialist (also known as direct buying). It purchases thousands of homes directly from willing sellers, renovates them, and aims to flip them for a profit — all in under 100 days. It’s typically a risky business model that requires a lot of capital and comes with a lot of potential for losses if the broader real estate market takes a dive. Previous industry leader Zillow Group learned that the hard way.

But Offerpad maintains its advantage comes from being selective in the markets in which it operates, combined with its quick-flip strategy, which limits the impact of home price gyrations. It’s so confident in its business model that even in the face of a difficult environment, the company has grown its footprint by 33% in 2022 to serve 1,800 towns and cities across 28 U.S. markets.

Offerpad generated $1.08 billion in revenue during the second quarter, a whopping 185% increase compared to the same period last year. It takes the company’s total revenue for the first half of 2022 to $2.4 billion, which is 270% more than it delivered in the first six months of 2021.

Offerpad has managed to stay profitable throughout the year even as the real estate market softened — but only just. Its net income came in at $11.5 million during the second quarter, so the margin for error is razor thin at the moment.

Despite strong results year to date, the party might be coming to an end (at least temporarily). The company has guided for revenue of just $800 million in the third quarter, which implies it expects a sizable dip in demand from homebuyers over the next few months.

Like Redfin, Offerpad has also expanded into other verticals to diversify its business. It has a home loans segment, as well as seller solutions for people who want to list the traditional way but who would also benefit from Offerpad’s home preparation and renovation expertise.

There’s no telling when the real estate downturn will resolve, and Offerpad has nearly $1.3 billion in inventory on its balance sheet, so it could be exposed if home prices fall significantly from here. The company has navigated the market well so far, but investors might want to observe how the situation unfolds over the next two quarters before taking a position in Offerpad stock to minimize potential risks.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Offerpad Solutions Inc, Redfin, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends the following options: short August 2022 $13 calls on Redfin. The Motley Fool has a disclosure policy.

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