One of the worst-hit industries last year was real estate. With skyrocketing interest rates, fewer people could afford to buy a home. Naturally, all sorts of companies that sell products related to home buying have been negatively affected, some to the extreme. Opendoor Technologies (OPEN 3.38%) is in that boat. It's down 91% from its highs and trades at a dirt cheap valuation. But not all cheap stocks are bargains. Should you buy Opendoor stock right now?
Why Opendoor is down in the dumps
Opendoor is an iBuyer, or a company that flips homes on its digital platform. It identifies homes for sale, makes an offer, fixes them up, and then resells them on its own marketplace. It provides bells and whistles such as video tours and quick cash offers to make for a competitive buying and selling experience, and it also has mortgages available on its platform.
As interest rates have increased, home sales have dived. There are a few different trends at work all related to each other: Mortgage rates are high, people have less money to spend, and because homebuyers aren't moving, there are fewer houses on the market for resale. Opendoor's revenue fell by half in the 2023 third quarter, continuing a downward trajectory.
However, it's making progress in efficiency. It's selling off its old book of homes and buying new homes with better risk management, and these are selling at higher profitability. Gross margin on the old book was negative 0.1%, while it was 9.8% on the new book in Q3.
It has been cutting costs and improving its pricing to accurately reflect market trends, and gross profit is back on the mend despite the revenue slide.
OPEN Revenue (Quarterly) data by YCharts.
Contribution margin returned to positive in Q3 and was better than expected at 4.4%.
As the company sells off the remainder of its old book and more sales come from the new book, profitability should continue to improve. Combine that with trends looking to shift in its favor, and 2024 could look a lot better for Opendoor's business.
Why did Opendoor stock skyrocket last year?
Opendoor stock gained an outrageous 286% in 2023 despite plunging revenue, losses, and continued pressure in the industry. That's a whole lot of investor confidence for a company still posting revenue declines and net losses. Opendoor stock has already lost 30% of its value in 2024, and it trades at the dirt cheap price-to-sales ratio of 0.23.
For investors who are in for the long game and with a degree of risk appetite, there's plenty of potential here. Opendoor is scooping up homes, and if macroeconomic conditions improve, it'll be in a position to rebound. In the third quarter of 2023, it acquired more than 3,000 homes, a 17% increase year over year despite new listings declining by 8% in relevant markets. If management's bet on stable or declining interest rates turns out to be right, Opendoor will be in a position to drive higher sales.
If you've already seen your investment in Opendoor stock skyrocket, you might be tempted to sell now. That wouldn't be a bad move if you've identified a more secure investment with stronger potential for gain, or you've changed your investment thesis for Opendoor stock. There's tons of risk right now. However, many great stocks go through up and down periods before soaring again.
Opendoor is positioning its business to be in a fantastic position in the future, and the stock could eventually reward investors handsomely. However, that may not happen until the real estate industry is on better footing. In fact, before it gets better, things could go further south, but the eventual gains on this volatile stock could be worth the risk.
