In 2021 and 2022, the hypergrowth technology bubble popped. Last year, it started to reinflate. Embodying this trend is Opendoor Technologies (OPEN 3.38%), a digital platform for residential real estate. The company, which went public through a special purpose acquisition company (SPAC) in 2020, saw its shares collapse more than 97% from their all-time high in 2021.
After starting 2023 trading near just $1 per share, the stock surged 286% last year. A lot of people have bet on Opendoor's comeback, but smart investors know you don't buy a stock simply because it's going up. Here are three things you need to know before buying this real estate technology stock in 2024.
1. Its margins are extremely tight
While the company has long hyped its technology, Opendoor's business model does not require any revolutionary innovation. The company buys homes from individuals -- collecting a 5% service fee in the process -- and then sells those same homes to other buyers. This kind of home flipping has been happening for decades, but Opendoor is doing it online and at a massive scale. In 2021 and 2022, the company purchased around 35,000 homes annually in the United States.
Home flipping -- unsurprisingly -- has thin profit margins. Though Opendoor was at one point generating over $15 billion in trailing-12-month revenue, it only generated about $1.5 billion in gross profit over that same period (good for a 10% gross margin). But in the past year, its gross margin has fallen to just 5.4%.
Data by YCharts.
2. Management is cutting costs, but the company is still losing money
Opendoor worked aggressively to grow after hitting the public markets. To do so, it started spending a lot of money on overhead costs and marketing. In 2021, sales and marketing expenses were $544 million compared to $195 million in 2020. While this did lead to revenue growth, it came at the expense of profitability.
Due to its thin gross margins, Opendoor posted a net loss of $662 million in 2021 on $8.0 billion in revenue. The next year, its loss rose to $1.4 billion on $15.6 billion in revenue. To fix these growing losses, Opendoor conducted multiple rounds of layoffs and looked to heavily reduce its overhead costs. For example, in the first nine months of 2023, Opendoor decreased its sales and marketing spending 51% year over year to $397 million. But even with these cost-saving measures, it still reported a $184 million loss during the period.
3. Growth is fueled by debt
Home flipping is not a capital-light business. It requires taking on massive amounts of inventory in order to grow, which requires a lot of upfront financing. At the end of 2021, Opendoor had $6.1 billion in real estate inventory sitting on its balance sheet, though that figure has shrunk to $1.3 billion as of Q3 2023. Because the core of this business still requires Opendoor to take on the buying process itself, effective inventory management is key to the company's cash flows, profitability, and growth.
So how can it afford to buy all this inventory if it isn't profitable? Debt.
Opendoor takes out loans to grow its inventory, which adds another cost to its income statement in the form of interest expenses. This is not insignificant for Opendoor, either. In the third quarter, Opendoor's interest expense was $47 million, or around half of the $96 million of gross profit it generated in the period. Debt-service payments are another headwind that Opendoor has to work through if it ever wants to deliver consistent profitability.
Add all this together, and it looks like Opendoor is a speculative real estate business masquerading as a technology company. Terrible unit economics and continued losses, despite major cost cuts, mean the company is still far from getting its income statement in the black. Investors should stay away from Opendoor stock even though shares may be rallying for the time being.