Real estate companies have been absolutely crushed by inflation and the resulting hiked interest rates. Some are feeling it more than others, and digital real estate companies, which were supposed to be the industry disruptors, have been some of the worst hit.
Opendoor Technologies (OPEN +3.92%) is an iBuying company, which means it buys homes and resells them through its digital platform. It also has a massive marketplace for buyers to find homes and a large agent network. This is clearly not its best moment, and Opendoor stock is down 93% from its highs.
Is this just external headwinds? Or is Opendoor in trouble? At least one Wall Street analyst sees the stock heading much higher this year. Let's see why, and what investors should do with Opendoor stock.
This is not the best time to be in real estate
Opendoor's revenue has dramatically plummeted in the high interest rate environment. Fewer homeowners are willing to part with their homes and take on a new high-interest mortgage, leading to lower inventory even for those who want to buy right now. It's a vicious cycle that isn't going to end unless interest rates go down.
Given that, Opendoor is doing well with what it has. It beat expectations for revenue, contribution margin, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the 2024 first quarter.
Revenue decreased 62% year over year but improved from the 2023 first quarter, and it sold 3,078 homes, a 63% decline from last year but 30% more than in the previous quarter. It reported a contribution profit of $57 million after a $241 million loss last year with a contribution margin of 4.8% versus a negative 7.7% margin last year.
Inventory is its bread and butter, so in contrast to many other kinds of businesses and expenses, it's important to see this kind of expense increase or remain steady to drive sales. It purchased 3,458 houses in the first quarter, almost double year over year, and it ended the quarter with 2,611 homes under contract. These are some successes, but it's still reporting net losses and even adjusted EBITDA losses. It won't be able to demonstrate a rebound in an atmosphere hostile toward its growth, and its stock is feeling that pressure; it's down 45% this year.
Can Opendoor stage a comeback?
There are a few factors to consider when evaluating Opendoor's suitability as a stock candidate. Is the company dealing with exclusively external headwinds, or is there a problem internally? Does its original premise remain intact? And will it be able to survive until it can get back to regular business?
Opendoor may offer a much better homebuying experience for customers. It doesn't have a long enough track record to be certain, but its benefits include its all-digital app, quick cash offers, and a massive marketplace. To see what that means in real life, it can pay a homeowner for their house and sell them a new one in a simple process.
That's something that would normally take a lot of time, with agents showing the home to interested buyers, potential bidding wars, and waiting for the mortgage to come through. That's before the seller even begins to think about a new home. Since residential is the largest category in real estate, with a current addressable market of $1.9 trillion, Opendoor can achieve serious growth by doing it better than the traditional model.
NASDAQ: OPEN
Key Data Points
Since Opendoor was built with digital infrastructure and machine learning, it has troves of data to inform its pricing, inventory management, and all of its operations. It has the potential to seriously disrupt the fragmented, traditional process. However, it won't be able to make real progress right now.
It's important to note that management is still forecasting revenue declines and adjusted EBITDA losses for the second quarter. Things are still likely to get worse before they get better.
Is this a bargain or a value trap?
This is a tricky setup. On the one hand, Opendoor could become a major player and deliver massive returns for patient investors. On the other hand, it could plunge further and take investors' money with it. In other words, it's a truly risky stock.
You can see this play out in Wall Street's analyst rating. The average Wall Street consensus target price over the next 12 to 18 months is to stay flat. But JMP Securities set its price target to $4, or 61% higher than today, while the lowest price target is $1, or 60% lower than today.
This isn't a risk most investors should take right now. If Opendoor really does have the potential to become an incredible business and market-beating stock, you'll be able to buy in and benefit at a later time.
