Bear markets can be particularly unforgiving to up-and-coming growth stocks. Investors might flock to safety, fleeing the unproven or riskier businesses.

Real estate technology company Opendoor Technologies (OPEN -1.91%) is a textbook example: The stock has fallen almost 90% from its high. Companies don't often come back from such steep drops, but there's evidence that Opendoor could.

Make no bones about it, Opendoor is a risky stock today but has the potential to create life-changing investment returns by disrupting a multitrillion-dollar industry that has remained largely unchanged for decades. The catch? It needs to survive some of the hardest economic challenges seen in years. 

Introducing Opendoor

Opendoor is trying to bring the speed and convenience of e-commerce to the real estate industry. It's in the business of iBuying -- when a company buys and resells homes. But Opendoor isn't a house-flipper per se; it isn't trying to maximize how much it sells homes for. It charges a 5% fee on each transaction, intending to move as many homes as possible, as quickly as possible, to get as many 5% turns on its capital as it can.

Essentially, convenience to consumers is the value proposition it offers. No need to worry about staging a home or negotiating with the other party every step of the way. Real estate transactions are typically very unpleasant, and Opendoor's growth is a sign that consumers will consider alternatives if the result is a better experience. While Opendoor recognizes the entire home value in each transaction as revenue, ramping from $2.5 billion in 2020 to $16.5 billion is an impressive feat:

OPEN Revenue (TTM) Chart

OPEN revenue (TTM); data by YCharts; TTM = trailing 12 months.

Opendoor's 5% fee means that iBuying is a business with very low margins. The company must buy and sell many homes to generate enough of those 5% fees to cover operating costs. The lack of profit is arguably the most crucial question Wall Street has about the company, especially in such a challenging economy.

The catch, and it's a big one

iBuying isn't an easy business model. You have to buy homes at low-enough prices that you can make money by the time you sell them, but you can't lowball homeowners or else they won't sell to you.

Predicting where a home's value might go between the time you buy it and sell it is a huge part of that equation and something that Opendoor's competitors have failed to accomplish. Zillow tried but gave up. Redfin was a minor participant but recently shuttered its iBuying operations to reduce losses.

Opendoor showed success in 2021 and early 2022. But rapidly rising mortgage rates blunted demand for homes, and prices have tanked in some of Opendoor's crucial markets, like Phoenix.

30 Year Mortgage Rate Chart

30-year mortgage rate; data by YCharts.

Opendoor posted a $928 million net loss in the third quarter of 2022, driven by a $573 million noncash write-down on the value of its housing inventory (due to declining home prices). The company has been adjusting its offers to build larger potential profits into homes it acquired after the springtime. Still, it must unload the homes it bought in the second quarter before overall margins will begin recovering. Management estimated that 35% of that unprofitable inventory would be left at year-end.

The company can't put up many quarters with such significant losses and expect to survive in the long term. But Opendoor still has roughly $3.3 billion in cash and an enormous $11.8 billion in borrowing capacity (70% committed by lenders).

So Opendoor isn't likely to run out of money in the near term. The company could scale back its business as needed if the housing market continues falling at the rate it has in 2022. The trend of its profit margins is the most important thing to watch over the coming quarters. Management is ramping up its third-party marketplace to try to boost margins.

The potential upside for long-term investors

Surviving this brutal housing market could unleash substantial investment returns. Opendoor has been beaten to a pulp, and the stock now carries a market cap of just $1.2 billion. It purchased 8,380 homes in the third quarter, but millions of homes are sold across America each year (not even including new construction). The company had a $50 billion annual revenue target set when the company went public. 

US Existing Home Sales Chart

US existing-home sales; data by YCharts.

Even if you translated Opendoor's (amazingly low) existing price-to-sales (P/S) ratio of just 0.06 to that revenue goal, the stock would increase almost threefold if successful. Note that the stock traded at a P/S of 6 last year! If we acknowledge that 2021 was a silly valuation, but suppose the company sells at a P/S of 1 over the long term. That's still a 38-fold return from today's stock price. You can play with the valuation and math, but the point is that not a ton needs to go right for Opendoor to be a multibagger investment from its current share price.

Wall Street is pricing in terrible news (bankruptcy), and Opendoor won't do much for investors if it goes under. But this bear market has eliminated competition, leaving the company as the dominant iBuyer if it can survive this adverse environment. It's a binary outcome, but the upside might make Opendoor worth taking a chance on. I can't think of a more boom-or-bust stock entering next year.