Weakening real estate demand and decelerating home prices have put OpenDoor (OPEN -3.59%), the world's largest iBuyer, in a tough position. The company reported discouraging third-quarter financial results, which pushed its stock price down another 20%, putting shares at a total loss of 88% over the past 12 months.
Now, the company has announced it's cutting 18% of its staff to help conserve capital and reduce its losses. Mass layoffs, while disheartening, aren't necessarily a sign the company is doomed, but there are indications of trouble ahead.
Let's take a closer look to find out whether investors should be buying at today's rock-bottom pricing or avoiding this stock completely.
What's going on?
In the years since the coronavirus pandemic erupted, short supply, low interest rates, and high real estate demand have sent home prices soaring. In an effort to combat high inflation and unsustainable growth in the housing market, the Federal Reserve has hiked interest rates. And it appears to be working.
At the end of November 2022, the 30-year fixed-rate mortgage rate was hovering between 6% and 7% . That's over double what it was just one year ago and means buyers are quickly putting their plans to purchase a home on hold. Home price growth has slowed down from 18% year over year at its peak in June to 13% in October. While it's still in the positive, a decelerating housing market isn't good news for OpenDoor.
In the third quarter, the iBuying company reported an adjusted net loss of $328 million, more than $310 million higher than in the prior-year period. Its adjusted earnings before taxes, interest, depreciation, and amortization (EBITDA) were also in the red, at a total EBITDA loss of $211 million. Its operating expenses grew by 42% against the prior-year period, while its loss from operations, or the loss it saw from the sale of its properties, was nearly 12 times higher.
To help reduce its cash bleed, at the start of November the company let go of 550 team members, which is around 18% of its staff. Cutting staff, as difficult as it may have been, is likely a smart move over the long term, but it likely won't be enough to meet the company's needs entirely.
Is OpenDoor in trouble?
iBuying, short for instant buying, is an alternative method to buying or selling a home. iBuyers use an algorithm to make instant offers to sellers online, buying the property and then making minor to major improvements. If all goes well, the property is relisted and sold at a higher price than its acquisition and holding costs.
But as we're seeing today, there's a lot that can interfere with profitability. OpenDoor's business model relies on the ability to sell the homes it purchases at a higher price than it paid to buy and improve them. In a decelerating market, that can be challenging because there's no way to accurately gauge the likely sale price.
That is precisely why the company is losing so much money. The company wrote off roughly $573 million in value of its existing inventory because of decreasing home values. If prices continue to decelerate, it's likely OpenDoor's losses will only increase.
As of the third quarter of 2022, OpenDoor had roughly 16,800 homes on its balance sheet located across 50 U.S. markets. Many of OpenDoor's primary markets are cooling much more rapidly than the national average. Phoenix, for example, the first market the company launched in, has seen a 173% increase in listed homes in October, and the median home price is less than 1% higher than it was a year ago.
However, there is a silver lining. The company attributes this quarter's massive losses largely to its "Q2 offer cohort," or the homes it purchased before the market started correcting. These homes have the thinnest profit spread because the market changed so abruptly. The company is now making fewer offers than it did earlier this year, and its current offers account for a decelerating market.
Should you buy OpenDoor?
This is OpenDoor's first big test. If the company is able to withstand this housing market downturn by cutting costs and mitigating risk aggressively, it could make a major comeback in the next several years. The knowledge and improvements to its algorithms could also help it hedge future downturns. However, it seems the market slowdown is only starting, which means OpenDoor has a long road ahead. Even at today's rock-bottom pricing, it's a risky stock to buy.
