Opendoor Technologies (OPEN +3.67%) dazzled investors over the last three months like few other stocks. The online home-flipper jumped an incredible 1,400% over the last three months, going from a little over $0.50 a share to more than $10 at one point.
The rally began with hedge-fund manager Eric Jackson making the case that the stock could be the next Carvana, which jumped to almost 100 times its original price after nearly going bankrupt in 2022. That argument gained steam online and helped turn Opendoor into a meme stock, as it initially surged on high volume and no news.
Since then, the stock gained on real news. That includes the prospect of the Federal Reserve lowering interest rates next week and later in the year, and the company's board overhauling its management team. In August, embattled CEO Carrie Wheeler stepped down; after hours on Wednesday, Opendoor named Shopify chief operating officer Kaz Nejatian as its new CEO, which sent the stock up 80% on Thursday.
Additionally, the company said that co-founders Keith Rabois and Eric Wu were rejoining the board of directors, and ventures associated with them were investing $40 million into Opendoor. It's easy to see how that news would inject enthusiasm into the stock, especially after it was on the verge of being delisted by the Nasdaq stock exchange earlier.
However, nothing's really changed for Opendoor as a business in the last three months. The company never reported a full-year profit, and the business is expected to shrink this quarter due to the weak housing market.
It's still a high risk with a questionable business model. If you're looking for a similar stock that can capitalize on falling interest rates, I think that Upstart Holdings (UPST +4.90%) is a better bet, and that it can outperform Opendoor over the next three years.
Image source: Getty Images.
Upstart's opportunity
Upstart has a number of things in common with Opendoor. Both went public around the same time in 2020, and initially surged out of the gate before plunging in 2022 as interest rates rose and tech stocks crashed.
Upstart is a loan originator. It uses artificial intelligence (AI) technology to screen applicants, producing results it claims are significantly better than traditional FICO scores. Once it creates a loan, it typically sells it to one of its funding partners, so it doesn't keep the debt on its books.
Like Opendoor's, Upstart's business was struggling back in 2022, but the company revamped its business with the help of an improved AI model that increased conversion rates for its loans. Even in a high-interest-rate environment, it's delivering strong revenue growth. And it's now profitable based on generally accepted accounting principles (GAAP).
Revenue in the second quarter jumped 102% to $257 million, on a 159% increase in transaction volume. The company reported GAAP net income of $5.6 million, and for the full year, it expects that to be $35 million.
Upstart built its business around consumer loans, but it's been expanding rapidly into auto and home loans. The home loan market, where it could potentially compete with Opendoor, is massive. In the second quarter, Upstart's home originations grew nearly 800% from the year-ago quarter to $68 million. That's still a small fraction of its business, but there's clearly more growth ahead in the home loan market for Upstart.
NASDAQ: UPST
Key Data Points
Upstart vs. Opendoor
Upstart and Opendoor have similar market caps following Opendoor's surge. Upstart is valued at $6.1 billion as of Friday, while Opendoor's market cap is $6.7 billion.
Both companies are also chasing massive addressable markets, and are likely to benefit from lower interest rates.
However, Upstart is the only one of the two that has proven it can grow in a challenging macro environment, and its business now looks set for consistent profitability. At Opendoor, meanwhile, there are real questions about whether home-flipping can scale up as a business model and deliver a consistent profit. Notably, both Zillow Group and Redfin (a subsidiary of Rocket Companies) bowed out of the iBuying competition, finding it too difficult and prone to large losses.
Given those differences, despite the fanfare over Opendoor, Upstart looks like the better bet today. Over the next three years, Upstart looks set to be the winner of the two.
