Real estate companies have been completely crushed by inflation and the resulting rise in interest rates. Some are feeling it more than others, and digital real estate companies, expected to disrupt the industry, have been among the hardest hit.
Open door technologies (NASDAQ: OPEN) is an iBuying company, meaning it buys homes and resells them through its digital platform. It also has a huge marketplace for buyers to find homes and a huge network of agents. This is clearly not its best moment, and Opendoor stock is down 93% from its highs.
Is it just external headwinds? Or is Opendoor in trouble? At least one Wall Street analyst believes the stock will go much higher this year. Let’s take a look at why and what investors should do with Opendoor stock.
It’s not the best time to be in real estate
Opendoor’s revenue has fallen dramatically in a high interest rate environment. Fewer homeowners are willing to part with their homes and take out a new high-interest mortgage, leading to lower inventory even for those who want to buy now. It’s a vicious cycle that will only end if interest rates fall.
Given this, Opendoor is doing well with what it has. It exceeded expectations for revenue, contribution margin and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the first quarter of 2024.
Revenues were down 62% year over year but improved from the first quarter of 2023, and 3,078 homes were sold, down 63% from last year but 30 % more than in the previous quarter. It reported a contribution profit of $57 million after a loss of $241 million last year with a contribution margin of 4.8%, compared to a negative margin of 7.7% last year.
Inventory is its livelihood, so unlike many other types of businesses and expenses, it’s important to see this type of expense increase or remain stable to drive sales. It purchased 3,458 homes in the first quarter, almost double year-over-year, and ended the quarter with 2,611 homes under contract. These are some successes, but the company is still posting net losses and even adjusted EBITDA losses. It will not be able to demonstrate a rebound in an atmosphere hostile to its growth, and its stock is feeling this pressure; that’s down 45% this year.
Can Opendoor arrange a return?
There are a few factors to consider when evaluating Opendoor’s suitability as a stock candidate. Is the company facing exclusively external headwinds, or is there an internal problem? Does its initial principle remain intact? And will she be able to survive until she can return to normal activities?
Opendoor can provide a much better home buying experience for customers. It doesn’t have a long enough track record to be sure, but its benefits include its all-digital app, fast money offers, and a massive marketplace. To see what this means in real life, it can pay a homeowner for their house and sell them a new one in one simple process.
This is something that would normally take a long time, with agents showing the house to interested buyers, potential bidding wars and waiting for the mortgage. This is before the seller even starts thinking about a new home. Given that residential is the largest category in real estate, with a current addressable market of $1.9 trillion, Opendoor can achieve significant growth by doing better than the traditional model.
Since Opendoor was built with digital infrastructure and machine learning, it has a wealth of data to inform its pricing, inventory management, and all its operations. This could seriously disrupt the traditional and fragmented process. However, it will not be possible to make real progress at this time.
Importantly, management still expects lower revenue and adjusted EBITDA losses for the second quarter. Things are likely to get worse before they get better.
Is this a good deal or a value trap?
This is a tricky setup. On the one hand, Opendoor could become a major player and generate massive returns for patient investors. On the other hand, it could plunge further and take investors’ money with it. In other words, it’s a truly risky stock.
You can see this reflected in Wall Street analyst ratings. The Wall Street consensus average price target over the next 12 to 18 months is to remain stable. But JMP Securities set its price target at $4, which is 61% higher than today, while the lowest price target is $1, which is 60% lower than today.
It’s not a risk most investors should take at this time. If Opendoor really has the potential to become an incredible company and a market-beating stock, you can buy into it and benefit from it later.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool features and recommends Opendoor Technologies. The Motley Fool has a disclosure policy.
This massively crushed stock could skyrocket 72% this year, according to a Wall Street analyst, originally published by The Motley Fool.
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