There is an ongoing debate on Wall Street about the official state of the stock market. As of June 2022, the benchmark S&P 500 the index closed 20% below its all-time high, which marked the start of a technical bear market. This was agreed and the market continued to slide until October 2022.

But the index has rebounded this year and recently rose more than 20% from its October low. Bank of America he was quick to declare the start of a new bull market, but other market professionals argue that the S&P 500 needs to hit a new all-time high before it gets that official status.

But everyday investors shouldn’t worry, because one way or another, history shows that the stock market always returns to new highs given enough time. That said, many stocks are still trading at significant discounts from their all-time best levels, and this could be an opportunity to buy before the next bull market kicks in (whenever that might be).

Real estate technology company Redfin (RDF extension -5.44%) he is one of them. It is down 88% from its 2021 high on concerns about rising interest rates and a sluggish housing market. But when the stock market eventually soars to new record highs, it will likely coincide with an improving economy, including a better housing market.

That’s why now could be a great time to buy Redfin.

Image source: Getty Images.

Redfin is in the midst of a major transition

To say that Redfin’s business has struggled recently would be a drastic understatement. In 2022, the United States Federal reserve waged the most aggressive campaign to raise interest rates in its history in order to tame up to 40 years of inflation. That held back the housing market, which had been hot throughout 2020 and 2021 thanks to near-record mortgage rates and pandemic-related waves of government stimulus.

Redfin was forced to shut down its RedfinNow iBuying segment in late 2022 due to the changing environment. It involved the company purchasing homes directly from willing sellers with the intention of flipping them for profit. But as property prices cooled, the company risked losing large sums of money on its property inventory. Direct buying accounted for more than 50% of Redfin’s total revenue, so plugging that hole isn’t going to be easy.

Redfin has returned to focus on its highly successful real estate brokerage and services segments. In the second quarter, it had 1,792 prime agents covering 98% of the geographic US market, but that’s down from 2,640 agents in the same quarter last year. The company has reduced its workforce in an effort to cut costs, which has resulted in a small loss of market share. Redfin accounted for 0.75% of all homes sold across America in the second quarter, down from 0.83% in the same period a year ago.

Redfin expects its market share to recover in the second half of 2023 because it is seeing an increase in its share of online traffic. Also, use new tools like artificial intelligence (AI) to provide a more efficient search experience for buyers. Redfin now has a plugin for the Chat GPT chatbot, which acts as a virtual assistant to feed users’ property lists within specific criteria set by them. This should help users avoid spending endless hours scrolling through real estate websites.

Redfin’s second-quarter earnings beat expectations, but its guidance disappointed

Redfin generated $275.6 million in revenue during the second quarter, down 21% year over year, but was within range of previous guidance. The company has now excluded iBuying from year-ago comparisons — if it had been included, the drop in total revenue would have been 54%.

But where Redfin beat expectations was at the bottom. The company told investors it could lose between $35 million and $44 million in the second quarter, but it only lost $27.4 million. That loss was 65% less than the year-ago quarter, which is a testament to Redfin’s cost cuts and careful expense management.

However, the company disappointed investors with its future guidance, and as a result, its shares plunged 24% after the release of its second-quarter report. He planned to break even on an adjusted basis EBITDA base in 2023, but the housing market decline was more pronounced than the company anticipated. It now expects to reach this milestone within the next 12 months, implying it could take until the second quarter of 2024 to get there.

The reason it was such a disappointment is because Redfin’s cash balance is declining. The company has only about $220 million in cash, cash equivalents and short-term investments on its balance sheet, meaning there’s a risk it could have to raise more capital if it extends its timeline to break even again. This would dilute existing investors, which could drive Redfin’s share price down.

Because Redfin stock is a buy ahead of the next bull market

Redfin has positioned its business to offer a healthy balance between growth and profitability once the housing market recovers. It may not happen until next year, when some experts predict the Federal Reserve will start cutting interest rates.

But waiting until then to buy Redfin stock could result in investors paying a much higher price than where it trades today. The company is valued at $1.2 billion as of this writing, and Wall Street analysts expect it to generate $1.14 billion in revenue for the full year 2023. That means the stock is trading at a price/sales (P/S) ratio. by around 1, which is a low valuation considering it has traded at a P/S ratio of up to 7.7 in the past.

I would say short-term challenges aside, Redfin will emerge from this period as a far better business. It has a real chance of being profitable next year, especially with the absence of iBuying, a notoriously difficult business to make money in due to its speculative nature. Brokerage and services like mortgages are cheap, so when the housing market recovers and Redfin’s revenue grows again, its profitability should accelerate.

With Redfin stock falling so steeply from its all-time high, I think the risk-reward proposition makes sense given an economic environment that could be more supportive for real estate next year.