What happened
Shares of Opendoor (OPEN 8.87%) tumbled 21.6% in April, according to S&P Global Market Intelligence, due to worrisome housing market data. The company's delicate financial health doesn't leave much wiggle room, and Opendoor will continue to suffer net losses as real estate struggles with difficult macroeconomic conditions.
So what
The company operates an e-commerce platform for residential real estate. It buys and sells homes, so its financial results are dictated by volume and pricing in the housing market. That sector was booming through most of the pandemic but has hit an exceptionally rough patch during the past year.
Image source: Getty Images.
Macroeconomic conditions have stunted demand for residential real estate, and several key indicators showed that these issues persisted in April. The National Association of Realtors announced that existing-home sales volume declined 2.4% from February to March, as unsold inventories rose.
The Federal Reserve has spent the past year raising interest rates in an attempt to contract the money supply and combat inflation. This has pushed mortgage rates to the highest level in nearly 20 years. Recent issues in the banking sector have caused lenders to tighten standards, too.
These factors have crushed demand among homebuyers. Even if prices have been resilient due to low supply, Opendoor is struggling against lower sales volume.
30 Year Mortgage Rate data by YCharts.
The unexpected steep decline in revenue forced Opendoor to focus on capital management to avoid a liquidity crisis. It cut operating expenses and focused on reducing inventory.
Much of this has been executed successfully, but the company was still forced to sell much of its inventory at a loss as prices dropped. There were some encouraging signs from the real estate market in April, such as rising new-home sales and median sale prices, but the news was mixed enough to make investors worry about Opendoor's ongoing challenges.
Now what
Opendoor reported quarterly earnings on May 4. Revenue declined nearly 40% from last year, while sales volume dropped 35%. Those results were much better than Wall Street's estimates, and the company also reported lower-than-expected losses.
It slashed inventory in half over the past year, and its new-purchase volume is down more than 80% from a year ago. Opendoor now has $1.1 billion of cash on the books and $5 billion of current assets, including inventory and restricted cash. It's burning around $200 million on a quarterly basis, so it does have some runway to survive a lean period.
It's hard to feel confident that the real estate market is set for a boom period over the next few quarters. Even if Opendoor has sufficient runway to overcome the current turbulence, it will probably need to raise more capital to replenish inventory and take full advantage of the eventual market recovery. Additional financing will reduce returns for shareholders.
Opendoor has been slammed over the past 18 months and now it has a valuation that reflects a fair amount of distress. Risk-tolerant investors who are confident in the business model have an opportunity to buy the stock at a steep discount. Risk-averse investors should consider the situation very carefully before getting involved.
