Everyone wants to make millions in the stock market, but picking the right stock is easier said than done. With shares up by a whopping 370% over the last month alone, Opendoor Technologies (OPEN -11.11%) looks capable of pulling it off. But is this rally the first sign of a sustainable bull run or just a hype-driven fluke? Let's dig deeper to find out.
A blend of e-commerce and real estate
Anyone who has purchased or sold a home recently knows the process feels a little outdated -- especially at a time when you can do everything from grocery shopping to buying a car online. Opendoor aims to help solve this problem by combining real estate with e-commerce.
Since its founding in 2014, the company has specialized in using data-driven valuation models to buy up vast numbers of homes. The goal is to use technology to bypass costly intermediaries like real-estate agents, retaining some of that value while giving home sellers a quick and seamless way to exit their property at an acceptable price.
OpenDoor's business boomed during the COVID-19 pandemic as low interest rates and government stimulus boosted housing demand. Shares peaked at an all-time high of $35.88 in 2021 before the company's value proposition and business model quickly began to unravel.
A fundamentally broken business model?
By late 2021, it was already clear that OpenDoor's i-buying strategy faced severe limitations. Unlike a typical e-commerce item, residential real estate has immense carrying costs, including property taxes, home insurance, and utilities. And while bringing in tenants could theoretically defray these outflows, occupants come with their own set of challenges, like property management costs, potential evictions, and lower liquidity.
The high carrying costs forced OpenDoor to try to sell its properties as fast as possible, which can mean accepting significant losses if the algorithm mistimes the market. And it can be argued that no one -- be they human or machine -- can reliably time financial markets. The company's first-quarter earnings report highlights its operational challenges.
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Revenue dropped 2.4% year over year to $1.15 billion because of a slight reduction in the number of homes cleared, and the company's net loss reduced 25% to $85 million. On the surface, the shrinking loss looks good, but investors probably shouldn't see it as a sustainable trend toward profitability because Opendoor doesn't control the most critical variables of its success, such as housing demand and interest rates.
The company's balance sheet is another problem. With just $559 million in cash and equivalents, Opendoor may struggle to fund its business without turning to outside sources of capital, like equity dilution, which can hurt investor returns by increasing the number of shares outstanding. In fact, management may see the recent rally as an opportunity to issue new shares and raise capital at a good price.
Is OpenDoor a millionaire-maker stock?
Despite its challenges, Open Door is capable of generating multi-bagger results if the real estate industry booms again like it did in 2021. Lower Federal Reserve interest rates (which indirectly lead to lower mortgage rates) would be the most likely catalyst for another rally. With a price-to-sales (P/S) multiple of just 0.35 compared to the S&P 500 average of 3.25, shares are extremely affordable relative to the market.
That said, while Opendoor's business model might reward investors during a real estate boom, it has already proven that it can't perform well when the market moves sideways or declines. The company feels more like a speculative meme stock than a sustainable long-term investment.
