Real estate technology company Opendoor Technologies (OPEN -14.68%) has been one of the best-performing stocks in the market recently. The clear leader in the iBuying industry, Opendoor recently attracted the attention of meme stock traders, which was fueled by hedge fund manager Eric Jackson posting a bullish investment thesis and projecting Opendoor could become a "100-bagger" in just a few years.
At the time, Opendoor traded for about $0.82 per share, so this implied an $82 price target.
To be fair, there has been some good news in recent weeks. Because the rally pushed Opendoor's share price well above $1, the company regained compliance with Nasdaq listing requirements, and canceled a scheduled special meeting to approve a possible reverse split.
While the soaring stock price of the past month was certainly an impressive run, the company's second-quarter earnings may have just given investors a bit of a reality check. After the report, Opendoor dropped by about 20% -- still much higher than it was a month ago, but it is clear that the numbers are making at least some investors second-guess their positions. Here are some of the key takeaways from Opendoor's earnings that investors should keep in mind.
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1. Second-quarter numbers were strong
On a positive note, Opendoor's second-quarter sales handily surpassed expectations. Analysts had expected $1.5 billion in revenue for the second quarter from the sale of nearly 4,300 homes, and Opendoor beat this by about $70 million.
On an adjusted basis, the company posted a loss of $0.01 per share, exactly what was expected and a completely manageable loss given the slow real estate market. And impressively, Opendoor generated its first adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profit in more than three years.
2. The third quarter could be much worse than expected
Here's the main reason Opendoor's stock was under pressure after earnings. Opendoor's third-quarter sales guidance was much weaker than expected. While a slowdown was expected (the second quarter is seasonally strong), Opendoor is guiding for about $838 million in third-quarter revenue at the midpoint of its range, while analysts were looking for more than $1.2 billion.
Part of this slowdown is fueled by Opendoor's planned transition to a "platform" model, which essentially integrates agents and other parties to real estate transactions into the process. Early results are strong -- as opposed to the traditional direct-to-consumer model, more than twice as many customers are getting to the point of a final underwritten cash offer, and the platform should significantly boost capital-light commission revenue over time, leading to margin expansion.
It's also worth noting that Opendoor's homebuying volume was much slower than you might think, given its sales volume. The company only purchased 1,757 homes in the second quarter, 63% less than in the second quarter of 2024, and inventory is about $700 million lower than at the same point last year.
3. Management is planning for the worst
One quote that stood out in management's letter to shareholders said, "Looking ahead, we believe housing market weakness will persist, and we are not assuming any near-term catalyst for improvement." All of Opendoor's expectations are based on the assumption that mortgage rates will remain high and sales volume will remain slow.
Opendoor reported observing "continually worsening housing conditions" during the second quarter.
4. Opendoor needs market conditions to improve
As a final thought, it's important to consider the numbers in the context of the agonizingly slow real estate market in which Opendoor is operating. Not only are existing home sales volumes low, but interest rates remain stubbornly high, keeping Opendoor's holding costs elevated.
Perhaps the biggest takeaway from the quarter (and the few quarters before it) is that Opendoor is making the best out of a terrible market environment. If the Federal Reserve actually starts cutting interest rates later this year and mortgage rates start gravitating downward, it could be a major catalyst for Opendoor's top and bottom lines.
To be sure, an $82 share price might be a bit of a stretch, at least in the next few years, even if market conditions cooperate. But the fact that Opendoor is close to breakeven in a bad environment could be a sign to not count this disruptor out just yet.
Having said that, whatever happens, Opendoor is likely to be a very volatile stock, and there's still a lot that can go wrong. So invest accordingly, and don't risk money you can't afford to lose.
