Is Opendoor Technologies Stock a Buy Now?

Opendoor (OPEN 3.38%) has been a tough stock to hold over the past two and a half years. The online real estate company went public by merging with a special purpose acquisition company (SPAC) on Dec. 21, 2020, started trading at $31.47 on the first day, and eventually closed at its all-time high of $35.88 on Feb. 11, 2021.

But today, Opendoor's stock trades at about $3. It lost over 90% of its market value as rising interest rates rattled the real estate market, throttled its growth, and cast a harsh light on its widening losses. Should investors still shun Opendoor's stock after that steep drawdown, or should they consider buying it as a turnaround play?

Image source: Getty Images.

What does Opendoor do?

Opendoor streamlines home sales and purchases with its online platform. It makes instant cash offers for homes, repairs the properties it buys, and then relists them for sale. It also provides app-based home buying and financing services for its potential buyers. Approximately 90% of Opendoor's purchases are completed without going through real estate agents.

In 2020, Opendoor's home sales dropped 47% to 9,913 units as the pandemic disrupted the housing market. Its revenue fell 46% to $2.58 billion, but it narrowed its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss from $218 million to $98 million as it spent less money throughout the pandemic.

Those numbers were unimpressive, but Opendoor predicted its growth would accelerate again once the pandemic ended. During its SPAC presentation in Sept. 2020, it claimed it could generate $9.8 billion in revenue in 2023, which would represent a compound annual growth rate (CAGR) of 56% from 2020. It also predicted its adjusted EBITDA margin would improve from negative 3.8% in 2020 to positive 0.1% in 2023. Unlike other SPAC-backed companies that fell short of their own lofty expectations, Opendoor actually surpassed its own revenue estimates ahead of schedule in 2022.

Data source: Opendoor. YOY = year over year.

But Opendoor is also losing its momentum

Opendoor clearly underestimated the magnitude of the housing market's post-pandemic recovery, but it also underestimated the impact of rising interest rates on home sales over the past year. In the first quarter of 2023, its revenue fell 39% year over year to $3.1 billion, which represented its second consecutive quarter of shrinking revenue.

Opendoor expects that pressure to persist with another 58% year-over-year revenue decline in the second quarter. For the full year, analysts expect revenue to drop 49% to $7.9 billion and miss management's original outlook of $9.8 billion.

As Opendoor's revenue growth cools off, its margins are shrinking. Its adjusted EBITDA margin dropped to negative 10.9% in the first quarter of 2023, compared to positive 3.4% a year ago, and it expects to post a negative adjusted EBITDA margin of roughly 10.5% in the second quarter. Analysts expect it to post a negative adjusted EBITDA margin of 8.3% for the full year, which also broadly misses its original target of positive 0.1%.

During its latest conference call, CEO Carrie Wheeler said Opendoor was "seeing some stabilization" in the housing market, but many "home sellers continue to be on the sidelines" and the "outlook for home prices continues to be uncertain." Wheeler also said it would "continue to operate with caution and discipline" while expanding its low-cost partnership channels (including home builders, agents, and online real estate platforms like Zillow) to attract more sellers.

Is Opendoor too cheap to ignore?

Opendoor's growth won't accelerate again unless the macro environment improves. Until that happens, investors will likely focus on its ugly GAAP (generally accepted accounting principles) losses -- which more than doubled from $662 million in 2021 to $1.4 billion in 2022. Its high debt-to-equity ratio of 3.9 will further limit its appeal as interest rates stay high.

On the bright side, analysts expect Opendoor to post a narrower net loss of $688 million in 2023, and it was still sitting on $2.8 billion in cash, cash equivalents, restricted cash, and marketable securities at the end of the first quarter. That's higher than its enterprise value of $2.5 billion, which is equivalent to just 0.3 times its projected sales for 2023. By comparison, Zillow trades at nearly five times this year's sales. But despite that low valuation, Opendoor's insiders still sold 9.6 million shares over the past three months and didn't buy a single share.

In other words, Opendoor looks dirt cheap, and any positive news might drive its stock higher. But it could get even cheaper in the near future as long as the housing market remains tepid. Therefore, Opendoor's stock might look tempting at these levels, but I wouldn't touch it until a few more green shoots appear.