Opendoor Technologies (OPEN 8.35%) is poised for a new era. If the business changes proposed by the company's new CEO are successful, it could be a very profitable venture. If the new direction fails, Opendoor will likely struggle to remain a going concern. The binary outcome here is fraught with risk.
Opendoor does not have a successful history
Opendoor went public through a merger with a special purpose acquisition corporation (SPAC) in 2020. The company basically flips homes, something that has largely been the purview of small, local investors. The idea is to purchase homes at a low price, renovate them, and sell them at a higher price.
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The key step in this process is acquiring the home. What Opendoor offers sellers is convenience. If Opendoor buys a home quickly and efficiently, it allows the home seller to avoid the time and hassle of fixing up and selling their home. Opendoor is, basically, attempting to arbitrage the often complex and frustrating home-selling process. It takes on the hard part with the goal of being able to turn a reasonable profit on a quick sale after the home is put on the market.
So far, however, Opendoor's income statement has been largely devoid of profits. House flipping on the scale needed to run a public company is a good idea that just hasn't seemed to work out as well as hoped. Which is why the stock had fallen to penny stock status prior to the CEO change.
However, the board of directors' decision to bring in Kaz Nejatian from Shopify as the new CEO has Wall Street giddy with excitement. The stock rose from less than a dollar per share to over $10 per share in a matter of weeks after the CEO's hire was announced. The shares have pulled back some, but at around $6 per share, they are still well above the low point.
What's changed about Opendoor?
The huge price advance has priced a lot of good news into Opendoor's shares, even though very little has happened to suggest it is deserved. Given that the company has yet to generate sustainable earnings, the price-to-earnings ratio isn't a useful valuation figure. However, the money-losing start-up's price-to-sales ratio has exploded from 0.09 times to 0.9 times.
Really, all that has happened so far is that Nejatian has laid out some bold plans. The key initiative is to integrate artificial intelligence (AI) into Opendoor's home-flipping business. This will enable a significant reduction in operating costs, as AI will essentially replace human employees. This move certainly aligns with the current market zeitgeist, given that AI is currently all the rage.
NASDAQ: OPEN
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If the new CEO's plan is successful, Opendoor could generate sustainable profits and become a significant winner as a stock, potentially helping investors reach millionaire status. However, this is somewhat of a lottery ticket, as there remains a risk that AI may not prove useful for house flipping. That wouldn't be shocking, given that every house is unique and every regional housing market is unique as well.
There's no easy fallback plan for Opendoor
The idea of using AI to flip houses is exciting, and the new CEO has provided investors with clear benchmarks to track Opendoor's progress. The problem is that there's no easy way to backpedal if this high-tech transition fails to produce results. Firing human employees means losing institutional knowledge that will be hard, if not impossible, to rebuild in the future.
For investors, Opendoor is a risky bet that has two potential outcomes. If the new CEO's plan succeeds, it could lead to a winning investment, although at least part of that opportunity appears to already be reflected in the stock price. If the CEO's plan fails, Opendoor could face a very difficult time sustaining its business long enough to rebuild the knowledge lost due to layoffs. Only the most aggressive investors should probably consider Opendoor right now.
