Where Will Opendoor Stock Be in 1 Year?

Opendoor (OPEN 3.38%) seemed like a promising growth stock when it went public by merging with a special purpose acquisition company (SPAC) in Dec. 2020. The online real estate company streamlined home sales by making instant cash offers for homes, repairing those properties, and relisting them for sale on its online marketplace. At the time of its public debut, about 90% of Opendoor's transactions were completed without any real estate agents -- which made it an appealing option for sellers and buyers. It also provided app-based home buying and financing services for its potential buyers.

Opendoor's stock closed at an all-time high of $35.88 on Feb. 11, 2021. But today, it only trades at about $3. Its stock collapsed as rising interest rates disrupted the real estate market and cast an unflattering light on its staggering losses.

Image source: Getty Images.

However, investors who bought Opendoor's stock when it dropped to its all-time low of $0.92 per share last December are now sitting on a gain of more than 200%. Is it time to book those profits, or could Opendoor's stock soar even higher over the next 12 months?

Two painful slowdowns over the past four years

Opendoor has already endured two crises since its public debut. In 2020, the pandemic caused its home sales to grind to a halt. Its growth accelerated in 2021 as the housing market recovered but slowed again in 2022 and 2023 as inflation and rising interest rates drove away potential buyers and sellers. That slowdown also caused its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) -- which briefly turned positive in 2021 -- to turn negative again.

Data source: Opendoor. YOY = year over year.

For the full year, Opendoor expects its revenue to decline roughly 56% to $6.9 billion, with a negative adjusted EBITDA margin of about 9.5%. That's well below the estimates it provided during its pre-merger presentation, when it claimed it could generate $9.8 billion in revenue in 2023 with a positive adjusted EBITDA margin of 0.1%.

That outlook seems bleak, but Opendoor's total number of homes purchased actually rose sequentially over the past two quarters, even as skyrocketing mortgage rates (which recently hit a 20-year high in the U.S.) reduced the market's total number of listings. Those forward-thinking purchases could put it in a strong position if the housing market recovers.

Moreover, Opendoor still expects to generate an annualized revenue run rate of $10 billion and for its adjusted net income to turn positive sometime in 2024. Therefore, analysts' expectations for Opendoor's revenue to drop another 9% to $6.3 billion in 2024 with an adjusted EBITDA loss might be a bit too pessimistic.

Focusing on the factors it can control

As Opendoor's growth slows down, it continues to focus on controlling its costs and expanding its partnership channels (home builders, agents, and online real estate platforms like Zillow) to attract more sellers. Its exclusive partnership with Zillow was live in 45 markets at the end of the third quarter. It's logical for Opendoor to team up with Zillow as the housing market shrinks, but it could also dilute its original vision of cutting real estate agents out of the loop.

Opendoor also expects its new artificial intelligence (AI) technologies to optimize its pricing, automatically categorize feedback, and extract the relevant data points to streamline its business. However, investors should recall that Zillow's overdependence on AI algorithms once caused it to overestimate the value of the homes its former Zillow Offers business purchased for resale. AI isn't a magic bullet that will solve all of Opendoor's recent problems.

The $1.2 billion in cash and marketable securities on Opendoor's balance sheet buy the company some flexibility. But its high debt-to-equity ratio of 2.9, steep losses on a generally accepted accounting principles (GAAP) basis, and overwhelming dependence on the housing market will keep the bulls at bay in this high interest rate environment.

Where will Opendoor's stock be in a year?

With an enterprise value of $3.5 billion, Opendoor seems cheap at 0.5 times this year's sales. Zillow, which faces similar challenges, trades at 4.3 times this year's sales. However, Zillow is more profitable on an adjusted basis than Opendoor. The low valuation should limit any downside potential for Opendoor over the next 12 months, but it will continue to underperform the market as high mortgage rates prevent its core business from stabilizing and recovering.