The Real Deal New York

Here’s why Redfin and Purplebricks shares have been sliding

The housing supply slump isn’t helping
By Meenal Vamburkar | July 31, 2018 08:00AM

Left to right: Redfin’s Glenn Kelman, a slide, and Purplebricks’ US CEO Eric Eckhardt

Investors have soured on Redfin and Purplebricks — at least for now.

Shares of both discount brokerages have taken a dive this year, as the broader housing market has posed a challenge. Even as investors and analysts bet on the longer term prospects of the companies, enthusiasm has dimmed in the the current climate.

Seattle-based Redfin has slid about 22 percent this year, though it remains above its $15 IPO price. But the main headwind is out of the company’s control: There’s not enough housing supply.

“The inventory problem could be an extended problem,” said Jason Deleeuw, an analyst at Piper Jaffray. “That’s causing the pace of home sales to be slower.”

Roughly a decade after the housing slump, the supply of available homes is low. The total inventory of homes reached its lowest recorded level at 1.48 million during the fourth quarter of 2017 — and builders are predicted to start fewer than 900,000 new homes in 2018. As a result, prices are rising faster.

For Redfin, that means slower transaction growth, even as its growth numbers have been strong, Deleeuw said. At the same time, the company has hired more agents — and, unlike traditional brokerages, pays them a salary. That expense eats into their gross margin, Deleeuw added.

In the first quarter this year, Redfin’s gross margin was 7 percent, down from 11 percent a year earlier. Its revenue climbed 33 percent to $79.9 million — but net loss widened to $36.4 million versus $28.1 million.

“Agents are hustling, but a lot of that time and energy and expense they’re deploying ends up not being fruitful,” said Tom White, an analyst at D.A. Davidson. “That’s impacted the enthusiasm of investors.”

Meanwhile, U.K.-based Purplebricks has plummeted about 31 percent this year — as its U.S. launch is proving to be a pricey endeavor. The company’s expenses for the first eight months in the U.S. were more than double that of the first eight months in Australia, real estate technology consultant Mike DelPrete said in a report. But the return on investment was a fraction of that in Australia.

The challenge is that Purplebricks chose expensive markets — New York and Los Angeles — to launch in the U.S., DelPrete said. The company, which charges sellers in the U.S. a flat fee, launched in New York after German media giant Axel Springer made a $177 million equity investment in the firm. Purplebricks said will spend $71 million of that money on its U.S. expansion, with a big chunk spent on advertising.

Purplebricks and Redfin are, of course, competitors. And, for both, market share is key. Purplebricks has overtly said that it’s focusing market share growth in the U.S. The company has expanded its footprint in California and launched in Arizona and Nevada.

As Redfin’s presence has been growing — market share ticked up 0.15 percentage points from the first quarter of 2017 — the brokerage is raising money through a stock and debt offering. Those funds may in part be used “to invest in or acquire third-party businesses, products, services, technologies or other assets,” the assets. Further growth could be what sets Redfin apart, White said.

“If Redfin can really put up some sort of dramatic market share gains, which they have shown early signs of doing, then you could see investors have increased belief in the long-term success,” he said.