Can Redfin Stock Bounce Back After Last Week's 10% Drop?

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One of this summer's hottest IPOs took a step back last week. Shares of Redfin (NASDAQ: RDFN) declined 10.3% last week, after Piper Jaffray analyst Jason Deleeuw initiated coverage of the tech-savvy real estate brokerage with an uninspiring neutral rating. He also set a price target of $26, a problematic goal for a stock that started out last week trading just below $28.

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This is only the third week that Redfin has closed lower after going public at $15 in late July, and it's the first time that the shares have experienced a double-digit percentage decline. The stock is still one of the quarter's best-performing debutantes, up 67% since its first appearance this summer. 

Handing over the keys

The real estate market is changing, and Redfin is shaking up the marketplace by hiring salaried brokers instead of commissioned real estate pros. The end result is that Redfin can shave away at the fees that typically eat into transactions, and that's proving magnetic to home sellers and potential buyers alike.

Revenue surged 35% in its first quarter as a public company, considerably faster than both the industry and even the leading real estate portals. Net income more than tripled. Redfin's guidance suggests similar top-line growth and an even wider profit for the third quarter, which ended over the weekend. 

Piper Jaffray's Deleeuw isn't necessarily down on the Redfin model, but valuation is a concern. He feels the stock is fairly valued, especially since he sees headwinds related to Redfin's hefty investments in generating leads and maintaining its growing ranks of agent employees. Deleeuw isn't alone. Several of the analysts that initiated coverage of the stock over the summer similarly went with neutral market calls.

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Redfin is on a roll, last week's dip notwithstanding. Visitors to Redfin's hub have grown at a higher rate over the past three quarters than in any period over the three previous years, the company noted in its most recent quarterly report. 

The network effect is working to Redfin's advantage. Homeowners with properties to sell are turning to Redfin to milk more money out of their real estate, and buyers are gravitating to the platform where the sellers are listing. The only limitation to Redfin is its ability to grow its reach with the necessary physical presence in metropolitan markets. In this regard, this summer's IPO a great way to raise capital for expansion. The stock's lofty valuation may limit analyst enthusiasm in the near term, but heady growth could remove that issue.

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.