Opendoor Technologies (OPEN +3.90%) has been the surprise meme stock of the year. The struggling iBuyer has been trying hard to make a comeback, but the poor real estate market continues to make it a tough climb.
Despite the company's underwhelming performance, the stock is on fire. It ended July up 245%, even though it reached close to 500% at one point, and it's already up another 37% in the first week of August. Can it go even higher right now?
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Much ado about nothing
Opendoor revealed its second-quarter earnings report on Tuesday, and it told a similar story to what's already been happening for a while. One step forward, two steps back. It's making some valiant efforts to stay afloat despite the dismal operating environment, but it's unlikely to report any solid progress until the climate changes.
Here are some highlights from the second quarter:
- Revenue increased 4% year over year to $1.6 billion.
- Gross margin contracted from 8.5% last year to 8.2% this year.
- Net loss narrowed from $92 million last year to $29 million this year.
- Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned positive at $23 million, up from a $5 million loss last year.
- Inventory balance decreased 32% from last year to 4,538 homes, or $1.5 billion.
- It ended the quarter with 393 homes under contract, down 78% from last year.
Management touted its adjusted EBITDA positivity, but it's guiding for a negative result in the third quarter, along with revenue to be slashed by about half from last year.
With the housing market continuing its downward slide and home prices at record highs, management was more careful about acquisitions. That keeps its financials tighter in the short term, but it also means it has less to sell in the back half of the year, leading to a negative cycle. The company isn't likely to break out of that cycle until there's meaningful change in the housing market, and that may not happen anytime soon.
"DORK" investing
Even with its recent jump, Opendoor stock recently traded around $2.00. It's fallen to pitiful levels as investors run for the hills. However, it's proven to be a great attraction for short-sellers, and that's where the meme status comes in.
Investors who short a stock expect the price to fall, and they make money when they buy it back at the lower price. As Opendoor's situation gets worse and worse, it looks like an excellent target for short-sellers. However, as the price rises, short-sellers buy it back before it gets too high, sending it even higher. What eventually happens is that the retail investors sell at the high to make money off the trade, and the price drops.
NASDAQ: OPEN
Key Data Points
Retail investors, driven by a shared sense of bringing down institutional investors and the rise of social media, famously put this into action when they generated a short squeeze for AMC Entertainment short-sellers in 2020. They've been active again over the past few months, heavily buying four new meme stocks: Opendoor, Krispy Kreme, Kohl's, and Rocket Companies, otherwise known as "DORK stocks."
Opendoor stock's rise has everything to do with this play to create another short squeeze. The price was starting to fall at the end of July, but since was going back up.
Focus on the fundamentals
The Opendoor story is in peril right now, and investors shouldn't be misled that the price increase was due to investor confidence in its rebound. Even at the higher price of $2.50, Opendoor stock traded at a price-to-sales ratio of 0.3, and it appeared to be a value trap, with a low price due to investor pessimism.
In a healthy scenario, a company like Opendoor that needs to keep a huge amount of inventory on its books will eventually make enough money to fund the purchases and keep cash flowing smoothly. But its debt-to-equity ratio has ballooned higher than 300% as it doesn't sell enough homes. That isn't a safe situation for shareholders.
Opendoor stock may continue to rise, but beware the fall after the squeeze. Investors should sit this one out for now.
