Real estate technology company Opendoor Technologies (OPEN 3.38%) was on an impressive growth trajectory before a miscalculation and a remarkably unlucky hiccup in the housing market combined to derail the business.
The company has spent the past four quarters recovering, and the stock was hammered during the back half of last year. However, the shares are up 180% since January, and it's time to wonder whether that recovery is real or just a stock bubble waiting to pop.
Remember that a company's fundamentals typically drive share prices over time, and there are some critical signs that things are heading in the right direction at Opendoor. Here is what you need to know.
1. The infamous 2022 Q2 is behind the company
The U.S. housing market cooled off unusually quickly last summer, which created significant problems for Opendoor. The company acts as a market-maker; it buys homes and then tries to resell them as soon as possible. Its goal isn't to maximize profit on the resell value but rather to churn out volume, because it collects a service fee on every transaction.
But buyer demand declined so fast that Opendoor still found itself underwater on thousands of homes it had bought. Management refers to this as the 2022 Q2 cohort, which comprised 14,135 units it had purchased.
US Median Price for Existing Single Family Home data by YCharts
Opendoor essentially spent the past four quarters offloading those homes at (mostly) losses, forcing the company to pull back on its growth plans, draining hundreds of millions of dollars from the balance sheet, and arguably influencing co-founder Eric Wu's decision to step down from the CEO chair.
Management noted that 99% of the troublesome Q2 cohort was sold or under contract as of Q2 of 2023. Starting next quarter, Opendoor will sell homes at much better margins.
2. Financial discipline in the right areas
Naturally, hard times can bring tough choices, and Opendoor had to slim down its business to help reduce its losses over the past year. Former CEO Eric Wu stepped down, and former CFO Carrie Wheeler stepped up. Since last summer, Opendoor has dramatically cut sales, marketing, general, and administrative expenses to conserve cash.
OPEN SG&A Expense (Quarterly) data by YCharts
Opendoor's cash and equivalents have only shrunk by $50 million over the past two quarters, leaving $2.8 billion on the balance sheet. The company should be well-funded, barring another disastrous cohort like 2022's second quarter. It should also help Opendoor slowly pursue growth again over time, hopefully, while turning a profit.
3. The competitive landscape is easier
Opendoor's business of buying and reselling homes, often called iBuying, is very difficult. Investors have seen how much a mistake can cost the business. But the high degree of difficulty has benefits too. Opendoor wasn't the only company to struggle with iBuying last year.
Fellow real estate tech companies Zillow and Redfin attempted and then abandoned iBuying, leaving Opendoor with far less competition today than two years ago. Offerpad remains the only publicly traded direct competitor at this point; Zillow even partnered with Opendoor to offer iBuying services to its users.
Meanwhile, U.S. residential real estate has a combined value of roughly $47 trillion, and the need for a home will remain a fact of life. While Opendoor must still prove a lot over the coming quarters and years, it's hard to deny the substantial potential for investment returns if things work in the company's favor.
