What happened
Shares of Opendoor Technologies (OPEN 2.74%) soared higher in the first month of 2023, according to data from S&P Global Market Intelligence. The online home flipper and iBuyer saw its shares bounce last month after data came out about a potential recovery in the U.S. housing market. The stock was undoubtedly helped by broad price appreciation in growth stocks last month as well. As of this writing, shares of Opendoor are up 135% year to date (YTD) but down 73% in the last 12 months.
So what
Opendoor is in the business of buying and selling homes in a process known as iBuying. ThAT simply means a real estate platform like Opendoor directly buys a home from someone and then sells it to someone else, with the hope of earning a profit in the process. This method of operation differs from other internet platforms like Zillow that mainly facilitate real estate transactions on their marketplaces.
Buying and flipping homes can be a great business when home prices are soaring, as they were in 2020 and 2021. But in 2022 the home market stalled out with mortgage rates rising at the fastest pace in recorded history. New homebuyers were priced out, with homes becoming unaffordable at previous listing prices, while many sellers didn't want to list their units at 20%-30% price cuts. Price cuts hit Opendoor hard, as the company makes money only if it can sell its real estate inventory at a higher price than what it bought it at. Last quarter, Opendoor's gross profit was a shocking negative-$425 million because of declining sales prices, even though revenue was up 48% year over year to $3.4 billion.
So why is the stock up so much in January? Well, after it collapsed in late 2022, investors are seeing signs of a potential housing market recovery. Redfin reported that pending home sales were up 3% from November to December, while mortgage rates have fallen from highs of 7% down to around 6%. More buyer and seller activity is good news for Opendoor, as it needs a consistent flow of transactions for its business model to work.
NASDAQ: OPEN
Key Data Points
Now what
Even though the stock is up a ton so far in 2023 and the housing market might be recovering, Opendoor is a stock all investors should avoid for now. It barely generated positive gross profit in the 2021 housing boom and relies on debt to fuel its home-flipping business, which is getting much more expensive with the Federal Reserve raising interest rates. 2022 was a terrible year for Opendoor, and it doesn't appear that the next few will be much better, either.
