Real estate tech companies have struggled of late, and Opendoor Technologies (OPEN +0.23%) is no exception.
The high-tech home flipper has been one of the biggest victims of the sluggish housing market over the last two years as rising interest rates have cooled demand for homes and pushed prices down from their peaks.
That pressure has led to a sharp sell-off in Opendoor stock, but it has also eliminated competition as both Zillow and Redfin shuttered their home-flipping businesses. With Opendoor stock now trading in penny-stock range -- under $5 a share -- investors may be wondering if it's worth buying or if the stock is headed lower. Let's take a look at the buy, sell, and hold arguments for the stock.
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Buy Opendoor stock
The best case for buying Opendoor stock may be that the macroeconomic situation is bound to become more supportive of its business eventually. The housing market won't stay down forever, and interest rates should fall.
Opendoor is about as sensitive to interest rates as any other stock on the market. Interest rates have a significant effect on home prices, and they're part of the reason that home prices are down from their peak. Mortgage payments on new fixed-rate loans have risen substantially since interest rates jumped, putting a new home out of reach for more Americans, and cooling off sales.
However, just as home prices fell as interest rates rose, the opposite is likely to happen when interest rates fall. That will favor Opendoor, as it will make its inventory worth more.
The other reason to buy Opendoor stock is that the company has made significant efforts to cut costs, which should put it in a better position to turn a profit once the real estate market turns. Last April, the company cut 22% of its workforce, following a similar round of layoffs in November 2022.
If it can keep the business efficient, the stock could soar when the housing market recovers.
Sell Opendoor stock
Opendoor's sell-off since its peak shortly after it went public should offer a warning sign for investors. The company is tied to the housing cycle, for better or worse, and home sales could remain sluggish for the foreseeable future. Most homeowners locked in low rates on their mortgages during the pandemic and are now reluctant to sell.
Additionally, Opendoor's management of the business thus far shouldn't inspire much confidence. The company continues to lose money even as it has scaled back home-buying after getting caught with overpriced inventory. In the seasonally strong third quarter, it reported an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $49 million, and it expects that loss to widen in the fourth quarter.
Home-flipping is also an unproven model at scale, and Redfin's and Zillow's departure from the industry seems to show that it's harder to make a profit in that business than expected.
NASDAQ: OPEN
Key Data Points
Hold Opendoor stock
There's a lot of uncertainty around Opendoor stock right now as speculation about interest rate cuts is moving the broad market. In fact, Opendoor shares fell 9% on Tuesday after the government reported that inflation was hotter than expected in January, leading investors to conclude that the Federal Reserve won't start cutting interest rates as soon as had been hoped.
The stock has been highly volatile over the last year, and it will likely take a shift in the housing market for investors to get a sense of the company's longer-term prospects.
The verdict: Hold Opendoor stock
There are a lot of unanswered questions about Opendoor. But we should start to get some answers by the end of the year as the Fed is expected to start lowering interest rates, unless the economy remains hot enough that it needs to keep them at their current elevated level.
At this stage, Opendoor is cheap enough that it's worth holding the stock until the housing market turns, even though that could take a while. In the meantime, look for the company to narrow its losses as it prepares for a lower-interest-rate environment.
