What happened
Shares of Opendoor Technologies (OPEN 3.38%) shot up by as much as 45% this week, according to data from S&P Global Market Intelligence. The real estate buying platform -- known as an iBuyer -- rose due to a report that housing prices in the United States increased in April. The stock is heavily shorted, making it much more volatile than the typical equity security.
As of the close on Friday, June 30, shares of Opendoor are up 37% this week.
So what
Opendoor's business works generally like this: The company offers to buy a home from the owner(s), giving them an all-cash offer. It takes a small fee on the transaction that it keeps itself. Then, Opendoor turns around and tries to sell this home to the market, hopefully making a profit in the process while also offering some other real estate services as add-ons for its customers.
Since the home inventory sits on Opendoor's balance sheet, the company is taking a risk that the value of these homes will decline. If it is only able to sell its inventory for a lower price than it paid for it, it is going to lose money (this also doesn't include overhead costs). So, when home prices are rising, investors think it is a bullish indicator for the stock.
This week, the S&P CoreLogic Case-Shiller Home Price Index reported that home prices rose by 0.5% on a seasonally adjusted basis, which was much higher than analyst expectations. Opendoor investors started bidding up the stock after this news came out.
What adds to this wildly gyrating share price is the high short interest on Opendoor stock. It is estimated that 12.6% of Opendoor's shares outstanding are sold short, making the possibility for a short squeeze fairly high, which may have happened this week. When a stock is heavily shorted, it can get squeezed and shoot higher in rapid fashion if a lot of short sellers decide to buy back their shares at the same time.
Now what
The problem with Opendoor is that, frankly, it doesn't make money. Over the last 12 months, the company has burned $1 billion in operating income and hasn't been profitable at any point in the last few years, even with housing prices going through a boom. Why would this time be any different?
OPEN Operating Income (TTM) data by YCharts
Avoid Opendoor stock, especially after this week's stock price rally. This is an unsustainable business model that should continue to lose money for shareholders.
