Redfin (RDFN) may have provided one of the first validations of the (presumed) investor fears that have weighed down the stocks of home builders since the February sell-off. In its last earnings report on August 9, 2018, RDFN provided this brief, yet significant, warning:
“We expect U.S. home sales growth to slow and even perhaps reverse in August and September…â€
In several Housing Market Reviews this year, I have pointed out the patterns of deceleration in several important housing market data sets. So, RDFN’s forecast is not shocking. Still, it was a rare acknowledgement from a player in the U.S. housing market. The guidance was based on the last four weeks of housing market activity, making these expectations fresh and forward-leaning from the earlier earnings reports from home builders. The housing market slowdown will have a material impact on RDFN’s business. From the Seeking Alpha Transcript of the earnings conference call:
“We’re now forecasting slower revenue growth for the third quarter, based on an unexpected drop in Redfin’s bookings growth in the past three weeks, slowing traffic growth and a weakening real estate market.â€
RDFN’s stock dropped 22.4% to a new all-time low in the wake of its earnings report. As if the slowing housing market was not enough, RDFN also reported a plunge in earnings per share due to a ramp in marketing spending and other costs. Investors never want to hear that a company’s business growth is highly dependent on the success of increased marketing (and/or sales) costs well in advance of revenue growth and during a year where the company expects to operate at a loss. Marketing spend in the second quarter increased a whopping 40% year-over-year (revenue increased 36%) and increased 35% year-over-year over the previous two quarters. Spending specifically on advertising media ramped 53% year-over-year in the second quarter. Fpr the third quarter RDFN expects to increase year-over-year growth in spending on selling and marketing. From the Business Outlook section of the earnings report:
