Like many of its real estate tech peers, Opendoor Technologies (OPEN 3.38%) shares have fallen sharply over the last year few years as mortgage rates have soared, putting the brakes on the housing market.
Unsurprisingly, Opendoor, whose main business is flipping homes, has suffered, posting wide losses and declining revenue as home values have fallen.
With the stock down 92% from the all-time high it logged in 2021, is this a buying opportunity or a red flag? To answer that question, we asked a bull and a bear to make their cases for the stock. Here's what they had to say.
Image source: Getty Images.
Bull case: Mortgage rates will come down
Jeremy Bowman: There's no doubt about it -- Opendoor's recent numbers are ugly. Revenue is tumbling, and its losses are steep, even as the company scales back on home buying to adjust to lower demand levels.
However, the question for investors considering whether or not to buy the stock isn't how Opendoor is performing today but how its performance a few years down the road might compare with its current state.
It's impossible to know for sure, of course, but there are a number of indicators that suggest greener pastures are ahead for the real estate tech company. First, the Federal Reserve expects interest rates to come down over the next two to three years, forecasting a Fed Funds Rate of 2.5% for the "longer run," or beyond 2025. The Fed expects it to fall about one percentage point in 2024 and 2025.
If that's true, it should boost the housing market, especially operators like Opendoor, which greatly benefit from rising prices. In fact, while inventory of existing homes is still unusually low, home prices are back on the rise. There's still a national shortage of homes, estimated at about 4 million, which should also support demand and pricing. Additionally, falling mortgage rates would bring a lot of buyers back into the market, further boosting prices and inventory.
Mortgage rates aren't the only reason to bet on Opendoor, though. The company is improving its business model, shifting customer acquisition spending to fixed-cost channels like homebuilders, agents, and online real estate platforms that allow it to find customers in a more cost-effective manner, especially in a down market. Meanwhile, its mature markets are performing well with the company reaching 3.9% share in markets it entered before 2018 -- versus a 0.7% share for markets entered since 2021 -- a sign the business should improve as newer markets mature.
The company expects contribution margin to turn positive in the current quarter, and margins should continue to improve thanks to better cost controls and an expected rebound in the housing market.
Opendoor stock is risky, but the company has a number of coming tailwinds that are obscured by its recent weak financial results. Look out a few years and you'll see a much rosier picture.
Bear case: Home buying is going to stay down for a while
Jennifer Saibil: Opendoor could be the next big thing in real estate, but the uncertainty around its business makes the stock extremely risky right now. Not only have sales tanked, but they're expected to stay sluggish for a while. Even when the housing market recovers, Opendoor still needs to prove it has a sustainable model that's better than what's already out there. It also faces competition from other instant buyers and digital real estate platforms.
In the second quarter, revenue fell 53% year over year to $2.0 billion. Homes are costly, which means Opendoor has to sell enough homes to cover the purchase of new properties, hold that inventory, and find buyers, all while leaving profits for itself. When there aren't enough homes to sell and fewer people buying, the model is at risk.
Adjusted gross margin narrowed from 13.2% in the year-ago period to just 0.4%, and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) plunged from a $218 million profit last year to a $168 million loss last quarter.Management is guiding for about $975 million in revenue for the third quarter, a 70% decrease year over year, and a $65 million EBITDA loss (at the midpoint).
Opendoor purchased 2,680 homes in the quarter, also down 81% year over year. That's an important step in balancing inventory to meet current demand, but the company also can't demonstrate meaningful growth without enough inventory.
Finally, it has a long way to go to become profitable on a net-income basis.
Data by YCharts.
This situation is likely to get worse before it gets better. Opendoor may have potential if taking a long-term perspective, but investors can find other places for their money right now and reexamine Opendoor when market conditions show lasting signs of improvement.
