• OPEN continues to face significant macroeconomic headwinds, including elevated mortgage rates and sticky inflation, impacting its near-term recovery prospects.
• Despite some improvements in profit margins and ongoing cost-saving measures, the company’s cash burn and lowered revenue estimates suggest ongoing challenges.
• OPEN remains inherently undervalued, offering opportunistic investors with a potentially rich capital appreciation prospect, albeit possibly negated by aggressive short sellers.
• Given the potential volatility and lack of immediate recovery catalysts, we recommend observing from the sidelines for now.

Opendoor Technologies: Minimal Recovery Catalysts – More Uncertainties In The Near-Term

We previously covered Opendoor Technologies (NASDAQ:OPEN) in October 2024, discussing its stock underperformance compared to its peers/wider market, despite the potential tailwinds from the Fed’s recent pivot, with the headwinds attributed to the management’s underwhelming FQ3’24 guidance and expensive FQ2’24 inventory levels.

Even so, we had believed that the iBuying company might generate a robust FY2025 performance, if not earlier by FQ4’24, thanks to the moderating mortgage rates and higher mortgage-purchase applications, resulting in our Speculative Buy rating then.

OPEN YTD Stock Price

Since then, OPEN has continued to trade sideways between $1s and $2s, as the wide market offered a +2.1% return.

It is apparent that market sentiments surrounding the iBuying company has been pessimistic, despite the Fed’s outsized pivot by 50 basis points in the September 2024 FOMC meeting, by 25 basis points in November 2024, and by another 25 basis point cut in December 2024.

If anything, the Fed’s hawkish tone in the recent FOMC meeting is likely to set the stage for a tough FY2025 as well, with the still elevated inflation potentially triggering a prolonged macroeconomic uncertainty along with prolonged borrowing cost normalization.

The same has been priced in by the market, as most analysts expect the Fed to hold the Federal Target Rate steady for the upcoming FOMC meeting in January 2025.

These may also be the reasons why the 30Y Fixed Rate Mortgage Average in the US remains elevated at 6.72% by December 19, 2024 and the 15Y rate at 5.92%, up from the September 19, 2024 bottom levels of 6.09% and 5.15%, respectively, compared to 2019 averages of 4.13% and 3.28%.

With borrowing costs still elevated, inflation still elevated, and home prices still expensive, it is unsurprising why the resale home supply remains impacted prior to the materialization of the magic mortgage rates at 5%.

These may also be the reasons why OPEN has offered an underwhelming FQ4’24 guidance, with revenues of $950M (-32.1% QoQ/ -86.2% YoY), contribution margin of 2.1% (-1.7 points QoQ/ +1.6 YoY), and adj EBITDA margins of -6.8% (-4.1 points QoQ/ +2.2 YoY).

Even so, keen eyed readers may already see the notable improvements in its profit margins on a YoY basis, with it underscoring why the management’s “raised spreads back in May” and the ongoing operations “with elevated spread levels throughout Q3, prioritizing risk management” have worked as intended in minimizing cash burn.

At the same time, OPEN has already announced its separation from Mainstay in August 2024, with it expected to deliver $35M in annual cost savings, on top of the headcount reduction by -17% in November 2024, building upon the -18% laid off in November 2022 – with these efforts likely to be directly accretive to its bottom-lines in the intermediate term.

The iBuying company’s inventory levels have also moderated sequentially to healthier levels at an average price of $341.11K per home in FQ3’24 (-2.2% QoQ/ +4.2% YoY).

This development has naturally allowed OPEN to generate an improved profit spread from the quarter’s US Existing Home Median Sales Prices of $414.1K (-0.6% QoQ/ +3.3% YoY).

The same has been observed in the positive FQ3’24 contribution margins of 3.8% (-2.5 points QoQ/ -0.6 YoY) and stable adj EBITDA margins of -2.8% (-2.5 points QoQ/ -2.2 YoY).

The Consensus Forward Estimates

Even so, given the mixed macroeconomic environment, while OPEN may have highlighted their focus “on reducing net losses and ultimately achieving adjusted net income profitability,” it is apparent that the cash burn may continue for a little longer, as observed in the consensus forward estimates above.

Combined with the likely to be higher for longer borrowing costs, we can understand why the stock has underperformed as it has, while naturally failing to ride the recent “broader stock market rally following Donald Trump’s 2024 presidential election win.”

So, Is OPEN Stock A Buy, Sell, or Hold?

OPEN 2Y Stock Price

For now, OPEN has continued to chart lower lows since June 2024, with the stock seemingly on its way to retest the next support levels of $1.50s or worst, the Q1’23 support levels of $1.25s.

OPEN Valuations

If anything, the macroeconomic headwinds have also contributed to OPEN’s lowered consensus forward estimates from the prior projected FY2026 revenues of $9.46B to $7.96B by the time of writing.

Even then, thanks to its penny stock status, it is undeniable that the iBuying company is extremely cheap at TTM Price/ Sales of 0.24x, compared to the prior article at 0.30x and the sector median of 4.57x.

Even when compared to Redfin (RDFN) at TTM Price/Sales valuations of 0.94x and Zillow (Z) at 7.79x, it is undeniable that OPEN offers opportunistic investors with a rich capital appreciation prospect, upon the normalization in macroeconomic outlook and improvements in its profit margins over the next few years.

When will this happen? Well, the outlook appears to be bleak in the near-term indeed, given the still elevated inflationary pressure, with the Fed projecting inflation to moderate only to 2.2% by 2026 compared to the favored number of 2%.

If anything, the President Trump elect has already highlighted his plans to propose higher import tariffs by up to “60% on China and imposing tariffs of up to 20% on all $3 trillion of US imports,” with it likely to trigger an elongated inflationary pressure in the intermediate term.

This development may naturally impact OPEN’s prospects as an iBuying company, given its sensitivity to mortgage rates and eventually, home buying/ selling activities.

The same has been highlighted by the management, in which Q3’24 has brought forth “further deterioration in key housing market indicators,” as “listing rates continued to decline and clearance rates declined more than seasonally typical. Overall, the housing market is on track to experience the lowest level of existing home sales since 1995 for a second consecutive year.”

Pending further US policy clarity in 2025, we believe that OPEN is likely to continue trading sideways at best, otherwise, hit new lows in the mean time.

Assuming the worst and the stock falls below the NASDAQ requirement of $1.00 per share, the iBuying company may be issued with a deficiency notice and eventually, face potential delisting as well.

While we remain encouraged by OPEN’s recent executions, we believe that it may have been too late and too little, with there remaining little catalysts for near-term recovery, worsened by the still elevated short interest of 9.87% by the time of writing.

As a result of the potential volatility, we prefer to downgrade to a Hold (Neutral) instead.

It may be more prudent to stand on the sidelines and observe for now.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The analysis is provided exclusively for informational purposes and should not be considered professional investment advice. Before investing, please conduct personal in-depth research and utmost due diligence, as there are many risks associated with the trade, including capital loss.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Opendoor Technologies: Minimal Recovery Catalysts – More Uncertainties In The Near-Term appeared first on Up2info.com.

• Interest rate cuts were supposed to help Opendoor — but they did little to fuel growth.
• Exisitng home sales remain below 4M, the lowest since 1995.
• Elevated housing market uncertainty forced Opendoor to maintain higher spreads, thus delaying Opendoor’s rescaling efforts.
• These are reasons why investors are throwing in the towel on Opendoor stock.
• Opendoor stock is the worst-performing stock in my portfolio — but I continue to believe in its future potential.

Introduction

Opendoor (NASDAQ:OPEN) — the number one e-commerce platform for residential real estate — is by far the worst-performing stock in my portfolio, down more than 50% YTD.

I must admit, it has been incredibly frustrating holding the stock despite the company repeatedly outperforming both guidance and expectations. Furthermore, interest rate cuts — which should be a tailwind for the highly cyclical and highly rate-sensitive real estate industry — have not helped the stock much either.

Nobody cares about this company anymore — investors, analysts, you name it. Heck, its earnings call was so short that it lasted only 24 minutes with only three analysts on the call. It’s that bad.

Despite being beaten and forgotten, I believe that the iBuying business model is the future — that Opendoor is the future.

The stock is still down 90%+ from its peak. At a Market Cap of just $1.4B in an industry worth trillions of dollars, the upside potential for Opendoor stock is massive.

Growth: Rescaling Delayed

Looking at Q3 results, Revenue for the quarter was $1.4B, up 41% YoY. This beat both the high end of management’s guidance and analyst estimates by about $0.1B. More importantly, this marks the first quarter of positive YoY Revenue growth, after seven consecutive quarters of negative growth.

This was driven by 3,615 Homes Sold in the quarter, up 35% YoY. The company also purchased 3,504 homes in Q3, up 12% YoY, leaving 6,288 Homes in Inventory, up 57% YoY, worth $2.1B in Inventory Value, up 64% YoY.

As you can probably tell, Opendoor is reentering growth mode.

However, keep in mind that all of the metrics above were down sequentially, due to seasonality as Opendoor enters the colder months where real estate transactions typically cool down as well.

In addition, management is expecting a “more challenging macro environment” in the back half of the year, which is why they have increased spread levels embedded in their offers. This has resulted in a sizeable drop in seller conversions, which explains the 27% QoQ decline in Homes Purchased in Q3.

To make matters worse, Opendoor ended the quarter with only 1,006 homes under contract for purchase, which is down 39% YoY and 44% QoQ.

Previously, management expected that the interest rate cuts would improve housing market conditions. However, despite the 50bps rate reduction in September, the housing macro remains unfavorable as many homebuyers and homesellers stay on the sidelines:

• Mortgage rates remain high at about 7%, reducing affordability.
• Home prices are at record highs, reducing affordability.
• Delisting rates continue to climb, suggesting waning seller interest.
• Clearance rates continue to fall, suggesting lower buyer demand.

As a result of the factors above, existing home sales remain below 4M, below the annual average of over 5M, and the lowest since 1995. That translates to a lower potential volume for Opendoor.

Due to elevated uncertainty in the housing market, Opendoor has maintained higher spread levels YoY through the back half of the year, leading to lower acquisition volumes. In Q4, management expects to purchase 2,200 homes, much lower than Q3’s acquisition volume of 3,504 homes.

Consequently, management issued soft Revenue guidance of just $925M to $975M in Q4, well below analyst estimates of $1.27B.

Lowered guidance means further delays in Opendoor’s rescaling efforts. Without sufficient transaction volumes, Opendoor won’t be able to achieve breakeven Adjusted Net Income.

This is why market participants are beginning to lose their patience — and therefore, are starting to abandon Opendoor stock altogether.

Profitability: Positioning For Efficient Rescaling

On a more positive note, higher embedded spreads mean better unit economics as Opendoor acquires homes at a wider margin of safety. This protects the company from impending home price volatility, ensuring that Opendoor will continue to be able to sell said homes at a profit, even if we see a substantial drawdown in home prices.

That said, here’s what Opendoor’s unit economics look like in Q3:

• GAAP Gross Profit was $105M at a 7.8% Margin, down 220bps YoY.
• Adjusted Gross Profit, which aligns the timing of inventory valuation adjustments when the home is sold, was $99M at a 7.2% Margin, down 140bps YoY.
• Contribution Profit, which includes direct and selling costs, was $52M at a 3.8% Margin, down 60bps YoY. This came in above management’s guidance of 2.9% to 3.5%.

As you may have noticed, margins across the board are down YoY, and this was primarily due to lower home price appreciation.

Management also expects lower HPA moving forward, which is why they have also issued soft Q4 Contribution Profit guidance of $15M to $25M. Alongside lower HPA, slower acquisition volumes also pressured margins due to Opendoor’s “resale mix shift from newer, higher-margin homes toward older homes with lower margins”.

As a result of soft Revenue and Contribution Profit guidance, management expects a full-year Contribution Margin of 4.5%, which falls short of their annual target of 5% to 7% Contribution Margin. Not the end of the world, but still not good enough.

The silver lining is that Opendoor still maintains positive unit economics despite the challenging housing environment.

In addition, Opendoor’s overall profitability in Q3 improved YoY:

• Adjusted EBITDA was $(38)M at (2.8)% Margin, which improved 220bps YoY. This was ahead of management’s guidance of $(70)M to $(60)M.
• Adjusted Net Income was $(70)M at a (5.1)% Margin, which improved 260bps YoY.

Improvements in Opendoor’s bottom line were due to lower Operating Expenses as a result of decreased Marketing Expenses and cost discipline across all functions of the business.

Moreover, management expects approximately $85M of annual expense savings in 2025 due to ongoing cost-cutting initiatives, including laying off 300 employees, or 17% of its workforce. This should make Opendoor a leaner and more efficient business overall.

More importantly, this should position Opendoor well to rescale the business, thus accelerating Opendoor’s path to profitability — the housing market just needs to cooperate a little bit for management to step on the gas pedal.

One thing I do want to note is that the actions we’ve taken today were primarily in our fixed cost structure and will not impair our ability to rescale the business. We are focused on growing the business when the housing market turns, and we’re intent on doing that in a sustainable way.

(Interim CFO Christy Schwartz — Opendoor FY2024 Q3 Earnings Call)

All in all, despite a tough housing environment, Opendoor was able to outperform its guidance and improve its bottom-line margins.

Opendoor just needs to rescale — but unfortunately, management doesn’t believe it’s the right time to do so. Until then, Opendoor stock will continue to struggle.

Health: Net Seller Once Again

On the bright side, taking a more conservative stance means a healthier margin profile, thus putting less pressure on its balance sheet, especially when the tide turns for the worse.

As it stands, Opendoor has $1.7B of Net Debt, which has been relatively stable over the last few quarters.

The difference is that Opendoor has relatively more Homes in Inventory on its balance sheet, at about 6,288 homes as of Q3, which is up 57% YoY. In dollar terms, that’s $2.1B of Inventory value, up 64% YoY. Put simply, Opendoor has much more working capital which can be converted into cash.

Speaking of which, Free Cash Flow turned positive in Q3, at a meager $56M, after four consecutive quarters in the red. This is because Opendoor was a net seller of homes in Q3.

As management guided for even lower acquisition volumes in Q4, I expect Opendoor to be a net seller of homes in the next quarter or two, thus increasing its cash position. This should allow Opendoor to ramp up home acquisitions at opportunistic prices, which should boost overall profitability as well.

Valuation: Speculatively Undervalued

At just $2 a share, I think Opendoor is extremely cheap. It trades at an EV to Revenue multiple of just 0.6x, which is well below its historical ranges, implying relative undervaluation.

As for me, I have a base-case 12-month price target of about $4.10 for Opendoor stock, implying a 100%+ upside potential based on the current price of $1.99. It is slightly lower than my price target from my previous article, mainly due to lower expected growth rates.

That said, my assumptions are laid out below.

While I think Opendoor stock is undervalued, I think it is one of the more speculative positions in my portfolio.

Any negative news affecting Opendoor stock could drastically impact the stock in the short-to-medium term. The stock will continue to be extremely volatile — sensitive to any developments in the residential real estate market.

By the same token, any slight positive news could serve as a major catalyst for the stock. For example, the NAR recently revealed that existing home sales in November climbed 3.4% month-over-month to 3.96M, slightly beating expectations by 0.01M. Even with this tiny margin of a beat, Opendoor stock skyrocketed 17% in a single trading day with 90M shares exchanging hands on that day, the highest single-day volume ever recorded for Opendoor stock.

Such a positive reaction tells me that there’s just too much pessimism baked into the stock.

Furthermore, additional rate cuts and the eventual decline in mortgage rates should serve as a major tailwind for Opendoor stock. Rates are already high and I don’t think it will go any higher. Sure, they may tick up slightly due to volatility, but in the medium term, rates should come down, which will be bullish for rate-sensitive stocks like Opendoor.

For these reasons, I think there’s much more upside potential than downside for Opendoor’s stock.

Risks

• Higher for Longer: If mortgage rates remain elevated and market participants remain on the sidelines, Opendoor’s rescaling efforts may be delayed even further, leading to prolonged downward pressure for Opendoor stock.
• Failure to Achieve Profitability: And even if Opendoor kicks into high gear, Adjusted Net Income profitability is not guaranteed. Questions remain about the long-term viability and sustainability of the iBuying business model. If Opendoor fails to turn a profit — even at the $10B Revenue run rate target — I think there will be little hope for Opendoor stock.

Thesis

As the stock price suggests, Opendoor looks beaten and forgotten. I think a lot of investors have thrown in the towel on the stock, given the uncertainties in the housing market as well as management’s bleak near-term outlook.

However, it’s worth noting that Opendoor is probably in its strongest position ever with positive unit economics, improving margins with cost optimization, and a disciplined rescaling strategy.

Furthermore, interest rates are expected to come down even further throughout 2025, which should be a catalyst for Opendoor.

Yes, it will take time for the thesis to play out. But considering the ongoing digital transformation in the residential real estate industry and Opendoor’s status as a virtual monopoly in the iBuying business, I believe the thesis will eventually play out.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of OPEN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Opendoor: Beaten And Forgotten appeared first on Up2info.com.

• Opendoor Technologies faces significant macroeconomic headwinds, including a challenging housing market and high-interest rates, which will likely continue to deteriorate its performance.
• Despite recent revenue growth, OPEN’s business model remains capital-intensive with low margins, making it difficult to achieve profitability, especially in the current economic environment.
• OPEN’s liquidity is severely strained, with a limited runway and potential need for additional funding, which could further dilute shareholder value.
• Valuation analysis suggests that OPEN’s share price is still overvalued, with a potential downside of more than 30%, urging investors to remain cautious.

Introduction

Opendoor Technologies (NASDAQ:OPEN) is a digital platform that seeks to transform the home selling and buying process into a streamlined process. Since the company launched in 2014, OPEN operates in 50 markets across the United States. OPEN’s business model involves acquiring a home, and reselling these home at a higher price after repairing and refurnishing.

Since reaching its high in 2021, OPEN’s share price has plunged more than 90%. On the surface, it may look like OPEN is an attractive buy. However, upon further investigation, my analysis suggests that OPEN’s performance is likely to continue to deteriorate. Macroeconomic headwinds will continue to weigh on OPEN’s performance; furthermore, OPEN’s business model is starting to show weaknesses. In this report, I will demonstrate why investors should avoid OPEN and not fall prey to this value trap.

Latest Developments

In 3Q24, OPEN generated 1.37 billion in revenues, representing a 40.51% year-on-year growth and -8.87% quarter-on-quarter decline. During this period, the company’s revenue beat estimates by $105.32 million. That being said, OPEN posted a gross margin of 7.63%; gross margin deteriorated by 217 bps as compared to the same period last year. SG&A improved substantially, from 13.47% in 3Q23 to 10.31% in 3Q24, improving by 316 bps.

Looking forward, OPEN expects to generate $925 million to $975 million in revenues. The company continues to expect negative EBITDA; OPEN expects Adjusted EBITDA to range between -70 million and -$60 million.

Housing and Macroeconomic Environment Will Serve As Challenging Headwinds

In 3Q24, OPEN had posted a strong performance, beating estimates substantially by 8.26% and successfully posted a positive year-on-year growth of 40.51%; this marks the first positive year-on-year growth after seven consecutive quarters of declining sales. Although it may seem like OPEN had finally turn around, systemic factors suggests that OPEN’s performance is likely to remain deteriorated. It is important to highlight that in 2022 and 2021, OPEN’s average revenue per quarter is approximately $2.9 billion with an average gross margin of 6.7%; today, while overall margins have improved, topline sales represent less than half of what it was previously making.

In the United States, we continue to see an extremely challenging housing market. Existing home sales have plunged to record lows. The last time we saw monthly existing home sales near the 3.5 million mark was in 2010. Currently, there is a housing shortage and supply deficiency, causing home prices to inflate significantly. According to the US Existing Home Sales Prices Index, home prices have almost doubled in less than a decade; in some places, home prices have more than doubled. Unfortunately, these inflationary effects have weighed on demand considerably.

Despite contracting supplies, when the US Federal Reserve started raising interest rates in 2022, we saw a huge divergence between the demand and supply of the housing market. Mortgage rates have spiked from about 3% to 6.79%, making it increasingly unaffordable for Americans to own homes.

Unfortunately, it is likely that demand will remain depressed. Although the United States Federal Reserve have already started pivoting, it is likely that rates will remain relatively higher for longer. US Federal Reserve Chairman, Jerome Powell have recently stated that there is no rush to lower rates as the economy remains strong. Moreover, recent studies have estimated that if president-elect Trump imposes a tariff rate of 60% on Chinese imports and 10% on other imports, there will be a huge inflationary effect, affecting households across the United States and providing a compelling reason for interests rates to remain higher.

Overall, the macroeconomic situation is extremely negative and is likely to continue to weigh on OPEN’s topline and operating performance. In the latest earnings call, CEO Carrie Wheeler highlighted a deteriorating environment for OPEN, stating, “We saw further deterioration in key housing market indicators in the third quarter. The listing rates continued to decline and clearance rates declined more than seasonally typical. Overall, the housing market is on track to experience the lowest level of existing home sales since 1995 for a second consecutive year.”

OPEN’s Business Model Is Showing Weaknesses

OPEN was founded in 2014 by Keith Rabois, Eric Wu, JD Ross, and Ian Wong; after 10 years, the company continues struggling to achieve positive operating margin. Ultimately, this is because the company’s business model is extremely capital intensive and provides limited margins, making it not only hard to operate but also extremely hard to scale.

If we look at OPEN’s performance since June 2021, in a period of low-interest rates, OPEN’s gross profit margin was 12% at best; extremely low margins for a technology company that is highly reliant on sales and marketing spending; they are burning money on advertising like big technology companies but have margins akin discount retailers. Additionally, because this is ultimately a real-estate play, OPEN will not only require financing but also have to take substantial risk by holding these properties on its balance sheet.

Given that OPEN’s gross margin is typically limited, adding accounting for SG&A spending and interest spending, we can fairly assume that OPEN is an extremely low margin business. For the past 13 quarters, SG&A spending is approximately 10.41% on average, while net financing costs is about 3%. This is the reason why, despite years of operations, OPEN has not been able to generate a positive bottom line.

OPEN must be able to reduce SG&A spending while maintaining its sales in order for its business model to work. Given that OPEN is not able to generate positive operating income in a favorable interest rate environment, it is highly unlikely that the company can even breakeven in the current interest rate environment. Unfortunately, based on the latest earnings call, CEO Carrie Wheeler stated that the company will continue to invest in marketing to drive conversion.

It is also important to highlight that it is not easy for OPEN to offload its inventory. For reference, OPEN’s days inventory outstanding is 157 days, while its debt-to-EBIT and debt-to-equity is 9.51x and 3.13x. Currently, housing inventory takes up more than 65% of the company’s total asset base. If a huge macroeconomic event causes a huge re-valuation of housing prices (towards the downside), we can easily see OPEN’s total assets fall below its total liabilities.

OPEN Is Forced To Reconsider Its Cost Structure and Business Model

Given that OPEN has not been able to breakeven, the company is forced to reconsider its cost structure to ensure survivability. In the latest letter to shareholders, the company announced a layoff of approximately 300 roles, representing 17% of their total workforce. Previously, OPEN had cut about 22% and 18% of its workforce in 2023 and 2022. This is the third consecutive year that OPEN had reduced its workforce.

Apart from that, the company has introduced other less capital intensive products such as List with Opendoor and Opendoor Exclusives. Unfortunately, although OPEN’s CEO stated that these initiatives have outperformed internal expectations, they are still in its early stages and unlikely to offset any headwinds that the company is currently facing.

Finally, it is important to note that the company’s liquidity profile is severely deteriorating; this is also the reason why OPEN has been consecutively reducing its workforce. Based on trailing-twelve-months data, OPEN’s has a cumulative and average quarterly operating cashflow of -1.05 billion and -$264.25 million. Currently, the company has $837 million in cash and short-term investments, representing a runway of 3.16 quarters. If OPEN continues its current burn rate, the company may not have enough liquidity to cover its operations. In my opinion, OPEN will likely need to raise funds through equity sale or take on higher debt; in either case, it will not be beneficial to shareholders.

Despite Falling More Than 90%, Valuation Analysis Suggest Further Downside

To derive the potential value of OPEN, I have multiplied OPEN’s current number of homes against the estimated value per home from multiple sources ranging from OPEN’s 3Q24 performance, Zillow Home Price Index, and US Census.

Based on OPEN’s latest balance sheet, the company has 6.29k homes in its inventory. According to the above-mentioned sources, the estimated value per home range between $359k to $420k. Utilizing these values, the total estimated firm value of OPEN range between $3.1 billion to $3.48 billion. After accounting for OPEN’s debt, cash, and short-term investments, the valuation model indicates that the implied share price of OPEN should range between $0.83 and $1.37. The mid-point of this range will suggest a potential downside of more than 30%, indicating that OPEN’s share price is still overvalued.

Closing Remarks

Overall, OPEN is operating in an extremely challenging environment. Unfortunately, the macroeconomic environment will not turnaround swiftly, and it is highly likely that we will continue to see dislocations in the housing market against the backdrop of relatively higher interest rates.

All of these factors will continue to weigh on OPEN. Moreover, OPEN’s business model is still questionable and has proved to be ill-suited in times of an economic slowdown and housing market instability. As such, I urge investors who are attracted by the ostensible value of OPEN to stay cautious. Perhaps, we can consider looking at OPEN again if the company is able to scale its capital-light services to offset the potential deterioration of its primary business model.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Opendoor Technologies: Business Model Showing Signs Of Weaknesses appeared first on Up2info.com.

• OPEN’s underwhelming FQ3’24 guidance has triggered its stock underperformance compared to its peers/wider market, despite the potential tailwinds from the Fed’s recent pivot.
• Even so, the US average mortgage rates have been moderating, with RDFN already reporting a +68% MoM in mortgage-rate locks by September 23, 2024.
• Combined with the higher mortgage-purchase applications, we believe that OPEN may generate a robust FY2025 performance, if not earlier by FQ4’24.
• Even so, with the iBuying company already reporting expensive inventory levels in FQ2’24 and guiding impacted adj EBITDA margins in FQ3’24, its reversal is likely to be prolonged indeed.
• While OPEN may be trading very attractively with robust support levels at $2s, the speculative stock is only suitable for investors with higher risk tolerance and long-term investing trajectory.

OPEN’s iBuying Investment Thesis Remains Compelling, Thanks To Its Overly Discounted Valuations

We previously covered Opendoor Technologies (NASDAQ:OPEN) in July 2024, discussing why we had reiterated our speculative Buy rating, with market sentiments likely to lift as the inflation cooled and the Fed potentially pivoting by September 2024.

With 2025 likely to bring forth higher home transactions and improved top/bottom-line performances, we believed that the stock remained a Buy for value and growth-oriented investors looking to buy the dip while riding the great upside potential.

OPEN YTD Stock Price

Since then, OPEN has underperformed expectations as it traded sideways at $1s and $2s, with it seemingly left behind by the exuberant market sentiments after the Fed pivots by 50 basis points.

With the stock being the outlier compared to the recovery observed in its real estate service/home builder peers, it appears that the market needs much more convincing surrounding its intermediate-term prospects, despite the moderating borrowing cost.

For context, Realtor.com has previously reported that a third of the surveyed Americans are more likely to buy homes once mortgage rates fall below 5%, drastically improved compared to the 22% reported at below 6%.

By the time of writing, the 30Y Fixed Rate Mortgage Average in the US has already moderated to 6.08% by September 26, 2024, and the 15Y rate to 5.16%, down drastically from the peak of 7.79% and 7.03% observed on October 26, 2023, respectively.

This development may also be why the online real estate brokerage company, Redfin (RDFN), has reported a tremendous increase in mortgage-rate locks by +68% MoM on September 23, 2024.

This is on top of the mortgage-purchase applications also up by +10% MoM, as RDFN’s Homebuyer Demand Index (a measure of tours and other buying services from Redfin agents) rose drastically to the “highest level since May during the week ending September 22, 2024.”

These developments may also be why we urge investors to look beyond OPEN’s supposedly underwhelming FQ3’24 guidance, with revenues of $1.25B at the midpoint (-16.6% QoQ/+27.5% YoY), contribution profit of $40M (-57.8% QoQ/-6.9% YoY), and adj EBITDA margins of -5.2% (-5.5 points QoQ/+3 YoY).

This is because FY2025 is likely to bring forth improved numbers, assuming that the residential real estate market continues to recover from September 2024 levels and the Fed embarks on a sustained rate normalization over the next few quarters.

This may be significantly aided by the iBuying company’s aggressive geographical expansions across most US states by the latest quarter while tapping into its partner agents to diversify its customer outreach through direct market listing (against selling to the iBuying platform).

On the other hand, it appears that OPEN may have also gotten way ahead of itself, based on the rather aggressive inventory levels at a higher average price of $349.11K per home in the latest quarter (+5.9% QoQ/+6.7% YoY).

This is based on FQ2’24 inventory values of $2.23B (+18.6% QoQ/+95.6% YoY) and 6.39K homes (+12.1% QoQ/+80% YoY) on the balance sheet.

While we remain optimistic about the demand recovery for residential real estate markets once the borrowing costs normalize, it is uncertain how profitable OPEN may be moving forward.

This is attributed to the narrower profit spread of 16.2% (-5.5 points MoM/-2.8 YoY) to the US Existing Home Median Sales Prices of $416.7K (-1.1% MoM/+3% YoY) by August 2024.

OPEN’s Performance Metrics

This development implies that OPEN may continue to report a mixed near-term financial/stock price performance before its bottom lines meaningfully improve, as observed in the projected sequential deterioration in its adj EBITDA margins in FQ3’24, compared to the sustained improvements observed over the past few quarters.

The Consensus Forward Estimates

This may also be why the consensus forward estimates remain mixed, with OPEN unlikely to generate any break even in FY2025 despite the projected double-digit growths in its top lines.

So, Is OPEN Stock A Buy, Sell, Or Hold?

OPEN 2Y Stock Price

These developments may also be why OPEN has not been able to sustain its upward momentum thus far, as the stock continues to trade sideways below its 50/100/200-day moving averages.

OPEN Valuations

Despite so, OPEN remains extremely cheap at TTM Price/Sales valuations of 0.30x, especially since the iBuying company is expected to record an accelerated topline growth at a CAGR of +32.6% between H1’24 annualized levels of $5.38B and the consensus FY2026 revenue estimates of $9.46B.

Even when compared to RDFN at TTM Price/Sales valuations of 1.46x, Zillow (Z) at 6.99x, and the sector median at 5.15x, it is undeniable that OPEN is compelling at current levels, with it offering interested investors with an expanded upside potential upon the reversal in its bottom-lines and market sentiments.

Based on the market capitalization of $1.41B and the consensus FY2026 revenue estimates of $9.46B, OPEN is even more compelling at an estimated FWD Price/Sales valuation of 0.14x.

Combined with the well-supported levels at $2 (albeit at penny stock levels), we believe that the bottom is already here – with it triggering an improved margin of safety for those looking to add.

As a result of its overly discounted investment thesis, we are maintaining our Buy rating for the OPEN stock here.

Risk Warning

It goes without saying that OPEN is only suitable for investors with a long-term investing trajectory, since its eventual reversal in profitability may only occur by the second half of the decade.

This implies that the stock is likely to remain volatile at penny stock levels, significantly worsened by the high short interest of 15.6% by the time of writing, up from the 13.7% observed at the start of the year and 12.6% a year ago.

At the same time, with OPEN unlikely to generate any Free Cash Flow profitability in the near term, we may also see its cash position on the balance sheet deteriorate from the $809M reported in the latest quarter (-18.2% QoQ/-24.2% YoY).

This development suggests its uncertain near-term prospects during the supposed residential real estate boom in 2025/2026, with the management likely to rely on expensive debts/asset-backed borrowings/revolving credit facilities during the ongoing cash burn.

As a result, we urge investors to size their portfolios accordingly, since OPEN is only suitable for those with a higher risk tolerance.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The analysis is provided exclusively for informational purposes and should not be considered professional investment advice. Before investing, please conduct personal in-depth research and utmost due diligence, as there are many risks associated with the trade, including capital loss.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Opendoor: Left Behind By Recent Market Recovery – Maintain Speculative Buy appeared first on Up2info.com.

• Despite declining mortgage rates, Opendoor’s share price remains under pressure due to economic uncertainty and its dependence on home price stability.
• The housing market’s current illiquidity and poor price discovery increase the risk of Opendoor struggling to move inventory.
• Opendoor’s balance sheet is probably strong enough for the company to weather a downturn but access to outside capital may be needed if/when the company returns to growth.

Despite declining mortgage rates, Opendoor’s (NASDAQ:OPEN) share price remains under pressure due to the uncertain state of the economy. This is most likely because Opendoor’s business is far more dependent on home price stability than market transaction volumes. While lower rates should help to stimulate volumes, there is an elevated probability of this coinciding with economic weakness and lower home prices.

The last time I wrote about Opendoor I suggested that expecting the stock to rise as rates declined was overly simplistic thinking. While mortgage rates are down over half a percent since then, Opendoor’s share price has fallen more than 50%.

Opendoor can likely weather an extended downturn, provided it is not overly severe, but it still needs to demonstrate the long-term viability of its business model. Partnerships appear to be lowering customer acquisition costs, which have been a problem. Improved brand recognition and a healthier housing market should also help in this regard. Opendoor also needs significantly greater scale to reach breakeven, but this will be difficult to achieve while the housing market remains volatile.

Market Conditions

Home sales remain at extremely depressed levels, down almost 50% compared to the 2021 peak. While there has been an expectation that lower rates would strengthen the market, Opendoor recently suggested that it has seen evidence of softening. This includes clearance rates, which are 30% lower than last year, and an increased number of sellers who are delisting. Opendoor also suggested that home price appreciation entered negative territory in June, two months earlier than a typical year. Opendoor has responded to this situation by widening its spreads to ensure that it is pricing effectively.

The housing market is illiquid at the moment, and price discovery is poor as a result. While home price indexes are generally showing rising home prices, median home sale prices are declining. This is a result of demand shifting to more affordable housing. This situation probably means that there is an increased risk of Opendoor having trouble moving inventory.

Opendoor needs predictable prices more than it needs strong transaction volumes. As a result, Opendoor doesn’t necessarily stand to benefit that much as mortgage rates decline. If unemployment rises, home prices will come under pressure, which would be very bad for Opendoor. As a result, macro uncertainty is more important to Opendoor at the moment than declining interest rates.

Opendoor Business Updates

Opendoor is trying to simplify the home buying/selling process and provide certainty to sellers. It does this by purchasing homes directly from sellers, using data and machine learning to determine its offers. After purchasing and renovating a home, Opendoor aims to sell it as quickly as possible at a small profit. While iBuying presents a large opportunity, margins are low, and no company has really proven the viability of the business model. To be successful, iBuyers need scale, operational efficiency and low customer acquisition costs.

In terms of customer acquisition, Opendoor is focused on partnerships to reduce costs. This includes homebuilders, agents and online real estate platforms. Customer acquisition costs through these channels are fixed, which should help Opendoor to reach more sellers in a cost-efficient manner. In total, over 40% of Opendoor’s volume is now coming through partners. Opendoor believes there is still room to increase its share with homebuilders and is trialing a List with Opendoor solution with one of its largest homebuilder partners at the moment.

Opendoor is also shifting its marketing mix to try and strengthen its brand. This makes sense given that in the markets where Opendoor’s aided awareness is 45%, it sees a 33% higher offer to contract conversion rate compared to markets with an awareness of 26%. Over half of Opendoor’s markets were launched in 2021 and 2022 and Opendoor’s awareness rate could reasonably be expected to rise over time as a result.

Sellers can now also choose to sell directly to Opendoor, or they can List with Opendoor and partner with an agent that Opendoor has prequalified and trained. The agent lists the home, while still providing the seller a 30-day window in which it can choose to accept Opendoor’s offer. This provides sellers with price discovery while allowing them to keep the certainty provided by Opendoor’s cash offer. List with Opendoor has led to a 10-point improvement in Opendoor’s Net Promoter Score in the relevant markets. List with Opendoor could be risky, though, as it increases the probability that sellers will only accept Opendoor’s offer when it is too high. List with Opendoor was expanded to nearly all of Opendoor’s markets in the second quarter.

Opendoor is also divesting its Mainstay market intelligence and data platform, allowing it to focus on its core business and simplify its cost structure. Mainstay will operate independently, and Opendoor will retain less than 50% ownership on a fully diluted basis. Opendoor doesn’t anticipate recognizing Mainstay’s financial results going forward. Mainstay has been contributing minimal revenue while adding around $17 million USD of adjusted operating expenses.

Financial Analysis

Opendoor generated roughly $1.5 billion USD revenue in the second quarter, a 28% sequential increase, driven by higher acquisition volumes in recent quarters. Opendoor has been ramping its business after a period of softer acquisitions in 2023. The company purchased 4,771 homes in Q2, up nearly 80% YoY due to lower spreads, increased marketing and larger contributions from partnership channels.

In response to weaker market conditions, Opendoor is now widening its spreads to ensure that it is pricing effectively. This will impact acquisition volumes going forward, and eventually sales. As a result, third quarter revenue is expected to be between $1.2 billion and $1.3 billion USD, representing close to a 30% YoY increase.

Opendoor’s contribution margin was 6.3% in the second quarter, with outperformance driven by Opendoor selling more newly listed homes with shorter holding times than anticipated.

Opendoor has responded to market weakness by lowering prices to maintain clearance levels within target levels, which will impact contribution margin going forward. As a result, Opendoor expects its third quarter contribution margin to be between 2.9% and 3.5%. If current macro trends persist, Opendoor may not meet its full year 5% – 7% contribution margin target.

On a more positive note, the NAR settlement could lead to lower commissions, which could benefit Opendoor by lowering its selling expenses. Opendoor suggested that between April and August, there were 15 basis points of compression on the commission side. It will take time for the impact of this change to become apparent, though. Lower commissions will reduce Opendoor’s costs, but this may just end up being passed through in the form of lower home prices, depending on market structure.

Opendoor’s adjusted operating expenses totaled $100 million USD in the second quarter, down from $107 million USD in the first quarter. This was largely the result of Opendoor reducing advertising spend by around $6 million USD.

Adjusted EBITDA loss was $5 million USD in Q2, compared to an adjusted EBITDA loss of $50 million USD in the first quarter. Adjusted EBITDA loss is expected to be between $60 million and $70 million USD in Q3.

While Opendoor has had some success controlling its operating expenses in recent quarters, it remains a long way from breakeven. The company probably needs to be generating around $3 billion USD revenue a quarter to achieve GAAP operating profitability. This is unlikely to occur while concerns about mortgage rates and housing affordability persist.

Opendoor ended the second quarter with $1.2 billion USD in total capital, including $809 million USD in unrestricted cash and marketable securities and $300 million of equity invested in homes and related assets. The company also has $7 billion USD in non-recourse asset-backed borrowing capacity, of which total committed borrowing capacity is $2.3 billion USD. While this provides Opendoor with substantial capacity to weather a downturn, the company could rapidly consume this cash and borrowing capacity if/when it returns to rapid growth.

Conclusion

Opendoor’s share price has diverged from companies like Redfin in recent weeks due to the likely impact of evolving macro conditions. While companies exposed to transaction volumes should benefit from a decline in rates, even if it occurs alongside a recession, Opendoor needs home price stability for its business to function.

Opendoor has managed recent market conditions relatively well, but it hasn’t been properly challenged yet. Changes in home prices are an important determinant of risk and profitability, and home prices have been fairly stable, despite a large drop in transaction volumes.

An extended housing market downturn may not be a death sentence for Opendoor, though. Similarly, a strong housing market is unlikely to help Opendoor achieve profitability. The company still needs greater scale, while maintaining efficient operations, and it needs to lower customer acquisition costs.

Opendoor’s high Net Promoter Score indicates that users value its service and there is a large opportunity in adjacent markets, like title and escrow, loans and insurance. While these markets are not as large, they offer far better margins. Success in adjacent markets is likely a necessity given the low margin and volatile nature of Opendoor’s core business.

Opendoor believes that its serviceable addressable market is currently around $650 billion USD, compared to a total real estate market of $1.6 trillion USD. Based on this serviceable addressable market, Opendoor is probably targeting something like $20 billion USD revenue under normal market conditions. Even with low margins, this could provide significant upside. The path to this type of outcome appears increasingly narrow, though.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Opendoor: Macro Uncertainty Is More Important Than Rates appeared first on Up2info.com.

• As the Fed is likely to lower its benchmark rates, both the macro environment and the real estate market are expected to become more favorable for the company.
• Having dropped more than 90% from its peak, I believe the current stock price is undervalued and presents an attractive entry point for investors.
• However, I’m trying not to become overly optimistic about this company due to several risks that I will discuss in my article.

Thesis

Opendoor Technologies Inc(Nasdaq:OPEN) is an online residential real-estate transaction platform that aims to provide more convenient ways of purchasing and selling homes. But its main source of revenue is flipping houses. The company purchases homes directly from customers, repair them and sell them at higher prices. Despite challenging macro headwinds such as growing concerns over the U.S. economy, I recommend that investors monitor this company as I believe the U.S. housing market is likely to bottom out and the company’s valuation is approaching an attractive entry point.

Overview of the Second Quarter Earnings: Good Performance, but Disappointing Guidance

In the second quarter, the company recorded roughly $1.5 billion in revenue with $129 million gross profits, beating both revenue and EPS estimates. However, the stock price declined sharply due to poor third-quarter guidance.

To dive more deeply into the company’s past and current performance, it is recovering from 2022 when it purchased homes excessively during the low-interest rate environment but had to offload its inventories as the Fed began raising its benchmark rates. The contribution margin which was -7.2% in the fourth quarter of 2022 increased to 6.3% in the second quarter of 2024. Additionally, the company successfully reduced its inventories from 16.9 thousand to 6.4 thousand in the second quarter of 2024 and acquired new houses in a more cautious manner.

However, in the third quarter guidance, the company expected revenue to be between $1.2 billion and $1.3 billion with the contribution margin expected to be between 2.9% and 3.5% respectively. As mortgage interest rates and house prices remain high, the housing clearance rate is low whereas delisting rate is increasing. Overall, I believe that the weak macroeconomic outlook combined with the lower margin guidance has disappointed investors.

An Improved Macro Environment is Expected in Coming Years

One of the reasons I’m cautiously optimistic about the company is that the Fed is likely to lower its benchmark rates as early as September. The left side of the graph shows the historical chart of the 30-year fixed-rate average mortgage rate, while the right side displays the historical chart of existing home sales. From 2022 to 2023, the Fed raised interest rates, which led to higher mortgage rates and, in turn, caused existing home sales to decrease to levels not seen since the financial crisis in 2009.

However, inflation and labor market have cooled down and the Fed is expected to lower interest rates, which is likely to reduce mortgage rates. In this environment, I believe existing homes sales will rebound, rather than decline below the levels seen during the financial crisis. An increase in housing inventories, combined with rising home transactions and lower interest rates, should lead to a more balanced housing market. In other words, even though it is difficult to predict exactly when the housing market will recover, I think the worst is behind us and the company’s earnings are more likely to improve in the coming years.

Attractive Valuation

Since the stock price peaked at $39.24 in February 2021, the market cap has dropped by more than 90%. During the COVID-19 pandemic, the company recklessly purchased houses, which were later offloaded at significant losses as the Fed began increasing its benchmark rates. At that time, the stock price dropped to roughly $0.92 in October. From April 2023 to August 2023, the stock price increased from $1.25 to $5.40 as the company announced positive earnings and overall sentiment in the real estate market improved. However, the stock price fell again as mortgage rates began to rise and the company downgraded its guidance. From November 2023 to December 2023, the stock price increased from $1.80 to $4.80 because, during that time, the Fed implied it planned to hold rates rather than increase them further.

I would value the stock based on its historical valuation, as both the P/E and P/S multiples may not be appropriate for this company. The company is not expected to make profits in the near future, and its revenue is simply the product of the selling price of houses and the quantity sold. Based on the stock performance analysis, investors can easily see that two variables that affect stock price movement besides the company’s earnings are interest rates and the real estate market sentiments.

When the stock price reached $0.92 in 2022, both the macro environment and the company’s earnings were at their worst. This is why I believe it is unlikely that the stock price will decrease to that level again, as the macro environment is becoming more favorable for the company. Additionally, the stock price tends to rebound at levels between $1.5 and $1.6, which may act as a bottom. At the time of writing this article, the stock price is fluctuating around $2.4. If the stock price falls to the $1.5-$1.6 range, the valuation could drop by 40%, whereas the upside potential is unlimited. In my opinion, if the price decreases below $2, it is worth monitoring.

Risk

However, there are several reasons why I maintain a hold rating, rather than a buy or strong buy, despite the positive signals mentioned above.

Firstly, even though the Fed begins to lower its benchmark rates, it may take some time for the real-estate market to rebound. A drop in mortgage rates resulting from more dovish Fed policies may lead to an increase in single-family home transactions. However, the overall cycle may unfold more gradually than expected. In other words, investors may need to be patient and wait for the company’s earnings to rebound.

Secondly, if the narrative of an economic recession gains traction, OPEN may be more severely affected than other industries. The Fed’s reason for pivoting is due to the cooling labor market and ongoing disinflation. If more people lose their jobs than the market expects and the U.S. economy heads toward a hard landing rather than a soft landing, stocks related to the real economy are likely to drop.

Thirdly, there is uncertainty about whether the iBuying business model can reach profitability. For the company to break even, it must increase transactions to cover expenses due to thin margins and a high proportion of fixed costs. Specifically, resale transaction costs, broker commissions, and property holding costs are included in operating expenses, which will fluctuate proportionally with revenue. As a result, the company needs a significantly higher volume of transactions to achieve profitability.

Conclusion

As the macro environment becomes more favorable to the company and the current valuation presents an attractive entry point, I recommend investors monitor Open Technologies Inc. However, because the stock price is relatively volatile, and a few risks remain, investors should be patient and conduct due diligence.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of OPEN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

As I already own shares of OPEN and may purchase more in the near future, I may have a biased perspective regarding this stock.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Opendoor Technologies: Valuation Approaching An Attractive Entry Point appeared first on Up2info.com.

• Virtually every single metric in Opendoor’s Q2 earnings report beat management’s guidance and analyst expectations.
• However, the company issued soft guidance against a weakening housing market.
• Despite the uncertainty, Opendoor’s fundamentals continue to improve, signifying strong business momentum.
• While Q3 will look soft, Q4 and beyond could look much better as the Fed is set to cut interest rates.
• Opendoor stock trades at only 0.6x its Revenue — but investors need a strong stomach to hold this stock.

Introduction

Opendoor Technologies Inc. (NASDAQ:OPEN) – the leading ibuying and online residential real estate company – reported strong Q2 earnings that beat both Revenue and EPS estimates. In addition, virtually every single metric came in above the high end of management’s guidance, reflecting strong business momentum.

Despite the outperformance, Opendoor stock fell sharply the following day, largely due to soft guidance and the broader market selloff. That said, this could be a dip-buying opportunity for long-term investors.

Though Opendoor stock is one of the riskiest stocks in my portfolio, I believe the stock still offers tremendous upside potential, especially considering looming rate cuts as early as September this year.

Growth: All Eyes on Interest Rate Cuts

In Q2, Opendoor generated $1.5B of Revenue, down 24% YoY but up 28% QoQ. This was above the high end of management’s guidance and this also beat analyst estimates by $40M.

The sequential growth in revenue was mainly driven by an increase in the number of Homes Sold, which was 4,078 in Q2, exactly 1,000 more Homes Sold QoQ.

On the acquisition front, Opendoor acquired 4,771 homes in Q2, up 78% YoY and 38% QoQ. This growth was driven by lower spreads embedded in its offers, higher marketing spend, as well as increased traction from its partnership channels including Zillow Group, Inc. (Z) and eXp Realty.

Without a doubt, Opendoor is stepping on the gas pedal in terms of home acquisitions and resales – it is gradually rescaling the business as it inches closer to Adjusted Net Income breakeven.

However, profitability may not happen as early as investors might have anticipated as elevated mortgage rates and interest rate volatility continue to negatively impact housing affordability for buyers and leave unattractive deals for sellers.

Furthermore, management mentioned that they’re seeing an abnormal slowdown in the housing market in the back half of Q2, risking a deterioration of the company’s fundamentals in the next few quarters.

During the second half of the second quarter, we observed signals in leading macro metrics that indicated a slowing in the housing market. Delistings began to rise and are currently at a higher level for this time of year than we’ve seen in our ten-year operating history. Second quarter market clearance rates, or the percent of listed homes that enter into a sales contract per day, have been declining more than seasonally typical. These dynamics resulted in softness in month-over-month home price appreciation (HPA), which entered negative territory in June, two months earlier than in a typical year.

(Opendoor FY2024 Q2 Letter to Shareholders)

As a result of the housing weakness observed by management, Opendoor began increasing its spreads, which negatively impacted acquisition volumes. At the same time, Opendoor also decreased listing prices in order to maintain its resale targets, which will be dilutive to Contribution Margin in the short term.

Considering all this, management expects Q3 Revenue to be slightly lower than Q2, at about $1.2B to $1.3B, which fell short of analyst expectations of $1.6B. This is probably why Opendoor stock sold off violently following its Q2 results.

While management’s remarks seemed all doom and gloom, they expect interest rate cuts of at least 50bps this year, which should boost housing market activity and therefore, provide tailwinds for Opendoor.

So Q3 looks like a soft quarter for Opendoor – but beyond that, when interest rates go down, we could see a decent ramp in Opendoor’s topline numbers.

On the positive side, Opendoor is still in its early stages with a $650B total addressable market within its current buy box. With its unique value proposition, net promoter score of 80+, and rapidly increasing brand awareness, Opendoor is well-positioned to capture this massive residential real estate market, which is still predominantly offline.

But for now, Opendoor needs to endure the pain – at least until the Fed cuts rates, which is expected to be in September.

Profitability: Rescaling is Necessary

Opendoor generated a Contribution Profit of $95M, representing a Contribution Margin of 6.3%, which is up 1,090bps YoY and 150bps QoQ. Contribution Margin also beat the high end of management’s guidance of 5.7%.

Such strong progress in the unit economics department was due to the company selling more new inventory as opposed to the old book of inventory, which has grotesque margins due to the housing reset in 2022. At this point, the negative impact from the old book of inventory should be negligible.

While Contribution Margins have been trending nicely, management warned of lower margins in the near term due to the housing weakness as explained in the previous section – in Q3, management expects a Contribution Profit of $35M to $45M at a 2.9% to 3.5% Contribution Margin.

That said, Opendoor’s bottom line continues to be negative:

• Q2 Adjusted Net Income of $(31)M at a (2.1)% Margin.
• Q2 Adjusted EBITDA of $(5)M at a (0.3)% Margin. This came in above the high-end of management’s guidance of $(25)M, due to “margin outperformance and ongoing cost discipline”.

Again, while losses are getting smaller, expect a slight reversal in Q3. For instance, management expects Q3 Adjusted EBITDA of $(60)M to $(70)M, which already includes cost savings from the spin-off of its single-family rental market intelligence and transaction platform, Mainstay.

The good thing is that management is rescaling the business responsibly, adapting quickly to the changing housing environment by widening spreads and cutting marketing expenses – they don’t want to repeat the same mistake of acquiring too many homes at peak prices like they did in 2022.

Applying higher spreads means a higher margin of safety when Opendoor resells the homes it acquired – if home prices go down, Opendoor would likely still be Contribution Profit positive given higher spreads embedded in its offers, unlike a year or so ago when Opendoor was forced to resell at huge losses.

That being said, Opendoor expects lower volumes in Q3, relative to Q2, which means lower Revenue and Contribution Profit to cover its fixed cost base. Thus, Adjusted EBITDA is expected to worsen in Q3.

However, rate cuts should spur housing transaction activity in Q4 and beyond, which should help Opendoor rescale its business… enough for the company to reach Adjusted Net Income breakeven.

Whatever it is, Opendoor needs to rescale further – or else it will stay unprofitable indefinitely.

Health: Resilient Position

As it stands, Opendoor has $0.8B of Cash and Short-term Investments with $2.4B of Total Debt, placing its Net Cash position at about $(1.6)B. The company also has about $7.0B of borrowing capacity, of which $2.3B has been drawn.

Net Cash position dropped slightly QoQ as the company was a net buyer of homes in Q2, as seen by its negative Free Cash Flow in the quarter, which was $(0.4)B. In Q3, given management’s conservative stance, we may see FCF turn positive. However, beyond that, I expect Opendoor to be a net buyer of homes once again.

As of Q2, Opendoor has 6,399 Homes in Inventory, up 80% YoY, valued at $2.2B, up 94% YoY. As you can see, Opendoor is rescaling gradually, as seen by the gentle slope over the last few quarters, as compared to the extremely steep slope back in 2021 and 2022. Moreover, Inventory levels are nowhere near 2022 levels.

For these reasons, I believe Opendoor has a more resilient balance sheet and inventory position than ever before, which helps to minimize any downside or inventory writedowns if we do see another housing shock.

Valuation: Cheap But Volatile

As it stands, Opendoor trades at an EV to Revenue of 0.6x, which is dirt cheap considering its potential to scale revenue by 5x, 10x, or even 20x from here. It will take some time to reach this scale, but it’s very much possible given its strong value proposition, strong brand, and strong competitive position.

Granted, it is cheap for a reason: 1) shaky global economy and housing market, 2) low-margin business model, 3) unprofitability, 4) negative growth, and 5) high mortgage rates – to name a few.

However, there are major positive catalysts ahead for Opendoor, including interest rate cuts.

Yes, the stock will continue to be volatile. It has been swinging from $1 to $5, and as of this writing, it is down by 10% due to the global market selloff currently.

Investors need a strong stomach to hold this stock.

I do have that stomach – though it has been pretty upset lately.

I am still bullish on the company. However, I’m lowering my price target – from $6 to $4 – due to slower-than-expected growth and increasing housing market uncertainty.

It represents an upside potential of 131%. However, I understand that it will be a volatile ride.

Risks

• Housing Correction: as mentioned by management, they are seeing some weakness in the housing market in the back half of Q2, and are proceeding cautiously. If we see another housing correction, Opendoor’s operations will take a major hit.
• Busted Business Model: the million-dollar question remains: can Opendoor turn profitable once it rescales? Can Opendoor sustain profitable growth and reward shareholders with positive earnings over time? Only time will tell…

Thesis

Opendoor’s Q2 results were a home run – it beat guidance and estimates in virtually all metrics.

But outperformance is not enough – its stellar results were completely eclipsed by soft guidance and a worsening housing market.

Thus, the stock sold off.

But it seems that there’s light at the end of the tunnel.

The company is rescaling. Margins are improving. Interest rate cuts are just around the corner.

It has not been easy holding Opendoor stock – but be patient.

I believe this is just the beginning of Opendoor’s turnaround story.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of OPEN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Opendoor: Outperformance Is Not Enough appeared first on Up2info.com.

• OPEN had naturally underperformed the wider market once the inflation rose and the Fed hiked interest rates in early 2022.
• With those headwinds behind us, OPEN now offers a compelling investment thesis for opportunistic investors looking to ride the great upside.
• The management has continued to report robust inventory metrics and expanding spreads, as observed in the promising FQ2’24 margin guidance.
• While OPEN remains highly shorted despite being a penny stock, we believe that the cooling inflation and the potential Fed pivot in September 2024 may bring forth great tailwinds.
• With 2025 likely to bring forth higher home transactions and improved top/ bottom-line performances, we believe that the stock remains a Buy for value and growth oriented investors.

We previously covered Opendoor Technologies (NASDAQ:NASDAQ:OPEN) in March 2024, discussing why we had maintained our Buy rating, thanks to its improving profit margins, healthier inventory levels, and promising FQ1’24 guidance.

While the iBuying company was likely to remain unprofitable in the intermediate term, the recovery in resale home market was likely to boost its inherently discounted valuations while triggering the expansion in its financial performance and eventually, stock prices.

Since then, OPEN has unfortunately pulled back by -38.1%, well underperforming the wider market at +22.3%. Even so, we are reiterating our speculative Buy rating, with market sentiments likely to lift as the inflation cooled and the Fed potentially pivoting by September 2024.

With 2025 likely to bring forth higher home transactions and improved top/ bottom-line performances, we believe that the stock remains a Buy for value and growth oriented investors looking to buy a dip while riding the great upside potential.

OPEN’s Bottom May Be Here

OPEN 4Y Stock Price

OPEN had a volatile four years indeed, with its prospects tightly linked to the uncertain residential property markets in the US.

While the iBuying company had successful 2021 and 2022 years, with robust top line performance and the occasional profitability, it was apparent that market sentiments had soured drastically as the inflation rose and the Fed hiked interest rates.

However, it appears that things may finally be turning around indeed.

Here is why.

1. The Fed Pivot Is Near

One, the Fed’s recent tone is already dovish with the market pricing in a rate cut in the September 2024 FOMC meeting, potentially signaling that the worst may already be behind us.

US Core CPI – June 2024

Much of the tailwinds are attributed to the consistent moderation in the US core CPI to 3.3% by June 2024 (-0.1 points MoM/ -1.5 YoY), with us nearer to the pre-pandemic averages of 2% than the September 2022 peak of 6.2%.

This development is highly beneficial for OPEN indeed, since the 30Y Fixed Rate Mortgage has also declined to 6.89% by July 11, 2024 (-0.06 points MoM/ -0.07 YoY/ +3.09 from 2019 averages of 3.8%), down by -0.9 points from the peak of 7.79% in October 26, 2023.

Assuming that mortgage rates continue to moderate, we may see the iBuying company report incremental volume growth and improved contribution margins moving forward, especially once we hit the “magic mortgage rate.”

Realtor.com has reported that a third of the surveyed Americans are more likely to buy homes once mortgage rates fall below 5%, drastically improved compared to the 22% reported at below 6%.

While it is uncertain when that may occur, we believe that the residential property market bottom may already be here, with it offering opportunistic investors with the chance of a great upside potential.

2. Spreads Appear To Be Improving

OPEN has been reporting lower inventory values over the past few quarters, at an average inventory price of $330K per home in FQ1’24 (-1% QoQ/ -2.3% YoY), compared to the peak average inventory price of $388K per home in FQ2’22.

The lower inventory prices are critical indeed, since it is representative of the management’s prudence during a housing market downturn while generating an improved profit spread to the US Existing Home Median Sales Prices of $385.1K (-0.4% QoQ/ +5% YoY).

This strategy has already allowed OPEN to report improved gross margins of 9.7% (+1.4 points QoQ/ +4.3 YoY) and contribution margin of 4.8% in FQ1’24 (+1.4 points QoQ/ +12.5 YoY).

The growing spread has also allowed the management to offer a promising FQ2’24 guidance at contribution profit margins of 5.5% (+0.7 points QoQ/ +10.1 YoY) and EBITDA margins of -2% (+2.2 points QoQ/ +6.5 YoY).

These numbers further underscore why the iBuying company has been oversold at current levels, attributed to its ability to incrementally generate improved margins.

3. OPEN Is Inherently Cheap Here

The Consensus Forward Estimates

This is the reason why the consensus forward estimates appear to be very promising from FY2025 onwards, with OPEN already expected to report improved adj EBITDA margins ahead.

While it is undeniable that it may remain adj EPS and Free Cash Flow unprofitable in the intermediate term, we believe that the management has demonstrated its iBuying proof of concept successfully, made particularly impressive given the extremely volatile and challenging market over the past few years.

OPEN Valuations

And this is why we believe that OPEN looks highly attractive at FWD EV/ Revenues of 0.46x and FWD Price/ Sales of 0.23x compared to its historical valuations as observed in the chart above, based on the projected top line growth at a CAGR of +12.7% through FY2026.

Even when compared to its real estate peers, such as Redfin (RDFN) at FWD EV/ Revenues of 2.5x with the projected top line growth at a CAGR of +10.9% through FY2026, and Zillow (Z) at 4.74x at +12.6%, it is apparent that OPEN has been overly discounted – offering interested investors with an improved margin of safety.

So, Is OPEN Stock A Buy, Sell, or Hold?

OPEN 2Y Stock Price

For now, OPEN has already bounced from the previous bottom of $1.70s in early June 2024 and showing signs of recovery as the US core CPI continues to cool on a QoQ and YoY basis.

Improving Market Sentiments

While it is uncertain when OPEN’s reversal may occur, we believe that market sentiments are already improving, as observed in the moderate CBOE Volatility Index and the rapidly reversing McClellan Volume Summation Index beyond its 1,000x neutral point.

While we are maintaining our Buy rating here, readers must note that the stock may remain volatile in the intermediate term, based on the elevated short interest of 15% at the time of writing despite its penny stock status (below $5 per share).

At the same time, the residential market is inherently cyclical in nature, implying that OPEN is likely to similarly fluctuate in stock prices depending on the rate of recovery and Federal Fund rate movement.

It goes without saying that the stock is only suitable for those with higher risk tolerance and long-term investing trajectory, with investors recommended to size their portfolios accordingly.

While OPEN appears to be achieving its “North Star remains rescaling our business and building towards a future of sustained profitable growth,” those whom buy in here must also temper their near and intermediate term expectations, since the normalization in macroeconomy likely to be prolonged through 2026, if not 2027.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of OPEN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The analysis is provided exclusively for informational purposes and should not be considered professional investment advice. Before investing, please conduct personal in-depth research and utmost due diligence, as there are many risks associated with the trade, including capital loss.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Opendoor: The Fed Pivot May Jumpstart Its Prospects appeared first on Up2info.com.

• Opendoor Technologies Inc. introduced an at-the-market equity program to raise $200 million over the next three years, indicating a need for additional financing.
• Even with improved revenue projections, there is still significant uncertainty over when the business will achieve sustainable, positive free cash flow.
• Some lessons on perspective on why being down 70% from its highs, doesn’t mean it’s a bargain. Or perhaps it is.

Investment Thesis

Opendoor Technologies Inc. (NASDAQ:OPEN) is a highly contentious stock. It’s a business with a lot of promise. But beyond its promises, what we are left with is a business that is still struggling to deliver positive free cash flow.

I used to believe with all my might that Opendoor could be a promising investment. And I’m not a “once bitten twice shy” investor. If the facts change, I’m happy to change my mind.

And while I would not declare that its stock is a sell, I am hesitant to call it a buy either.

Rapid Recap

Back in 2023, October, I said:

Opendoor believes that by H1 2024 this business will be operating at free cash flow breakeven. If that transpires to be the case, Opendoor business will have been put through the most challenging housing environment in more than a decade and will be vindicated, demonstrating to naysayers that the business model can be operated in a sustainable fashion, irrespective of any market downturn, down or up.

Fast-forward to H1 2024, and we are still inching closer to breakeven on its EBITDA. Is this truly as good as it’s going to get for Opendoor? Breakeven profitability? Or is there more to it? I believe it’s a tough call.

Why Opendoor? Why Now?

Opendoor is a digital platform that helps people buy and sell homes more easily and quickly. Instead of the traditional process of listing a home on the market, homeowners can sell their house directly to Opendoor for a cash offer, often avoiding the lengthy. It aims to make real estate transactions simpler and more convenient for consumers.

Meanwhile, Opendoor faces headwinds as it strives to rescale its business. Despite exceeding revenue expectations and achieving notable acquisition volumes, the company is grappling with the macroeconomic environment.

The fluctuating market conditions present an obstacle, impacting transaction volumes.

Nonetheless, Opendoor has managed to nearly double its y/y acquisition volumes.

That being said, importantly, Opendoor has introduced an at-the-market equity program to sell up to $200 million in shares over the next three years. This is not a business that is expecting to reach positive free cash flow any time soon.

Given this context, let’s now discuss its valuation.

Growth Rates Should Improve, But How Sustainable Is It?

Opendoor’s revenue growth rates beginning Q2 2024 will start to become more favorable. Throw in some easing of macro conditions, and all of a sudden, Opendoor can post some topline growth rates. Perhaps.

Possibly, starting Q3 2024, Opendoor delivers some positive growth rates. Then, all of a sudden, Opendoor can declare that they’ve stabilized the business and put forth a narrative of how the business is now quite different.

Needless to say, this setup would be very bullish, particularly given that its valuation, at least at first glance, doesn’t look stretched. Something we discuss more thoroughly next.

OPEN Stock Valuation — It’s a Tough Call

When I started out investing, if I saw a chart like the one above, I would be immediately compelled to buy this stock. This had to be a bargain, after all, the stock is down more than 70% from its highs.

Today, I am not as quick to make assumptions. Today, I know two things. Firstly, where a stock was yesterday or last month makes no insight into where the stock will be tomorrow or next month.

Secondly, dismissing a business just because it’s down 70% from its highs isn’t constructive, either. Here are two examples to justify my argument.

Innodata (INOD) is a consulting business that strives to help its customers harness AI, by creating data sets to train AI models. The stock was down 70% before turning around and is now at an all-time high.

Similarly, another business that many suspect to be washed away, Groupon (GRPN), is now up more than 200% in the past year.

Netflix back in 2011 is another example. Therefore, we should not be too quick to say that down is out.

But the problem with Opendoor remains. The business is struggling to reach breakeven on its EBITDA line. That being said, I do believe that at some point soon, there’s a possibility for Opendoor to reach breakeven.

On yet the other hand, Opendoor’s business model is highly seasonal, with Q2 being its strongest quarter of the year. And since Opendoor’s Q2 only guides for negative $25 million EBITDA at the high end, even if Opendoor does deliver a beat on the high end of its own guidance and delivers close to negative $15 million of EBITDA, the fact remains, this is as good as it’s going to get this year.

Altogether, I can’t recommend Opendoor Technologies Inc. stock. There’s still too much uncertainty over when exactly the business will start to report positive, sustainable, free cash flow. Meanwhile, investors also have to contend with its at the market equity offering.

The Bottom Line

Given the persistent Opendoor Technologies Inc. struggle to achieve positive free cash flow, combined with ongoing macroeconomic challenges and the introduction of an at-the-market equity program to raise $200 million over the next three years, it is prudent to be cautious about recommending Opendoor at present.

The company’s performance shows some promise, but its inability to reach consistent profitability and the uncertainty over sustainable growth make it too risky an investment.

Therefore, despite some potential for improvement, the current financial instability suggests it’s too tough a call to make.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post Opendoor: Path To Breakeven Remains Far, A Very Tough Call appeared first on Up2info.com.

• Opendoor stock has dropped nearly 50% this year after a strong rally in 2023.
• Because of this, many investors might have lost hope for Opendoor stock.
• Yes, there are valid arguments against Opendoor stock.
• However, I believe the worst has already been priced in. At the same time, I believe the worst has already passed.
• That said, let me share 5 reasons to buy OPEN stock.

Introduction

After rallying 150%+ in the last two months of 2023, Opendoor (NASDAQ:OPEN) stock has cratered back to where it was, down nearly 50% so far this year.

Bulls were partying in January — but now, there seemed to be no bulls left.

Just by looking at the chart, you’ll understand why some investors might have lost their conviction in the company.

It’s easy to get too emotionally attached to the stock price and lose perspective, so let me share five reasons why Opendoor’s stock is still a great buy today.

Reason #1: Amazing Value Proposition

As we know it, the traditional process of buying and selling homes is incredibly complex, uncertain, and time-consuming. On average, it involves five home visits, six counter-parties, and over 60 days on the market. What’s more, there’s a 20% chance that the transaction falls through.

It’s a big headache.

Opendoor aims to eliminate this friction by transforming the home-selling experience into a simple, fast, certain, transparent, and online experience.

• No more back-and-forth negotiations
• No more waiting
• No more repairs
• No more open houses
• No more agents needed

Homeowners can just sell their homes directly to Opendoor and avoid all the hassles typical of a traditional home transaction.

As of Q1, 15% of Opendoor homes had been listed on the market for more than 120 days, as compared to 19% for the broader market, demonstrating Opendoor’s superior value proposition in terms of speed and certainty.

It’s a convenient value proposition that ought to redefine how homeowners transact over the next few decades. And with an industry-leading NPS score of about 80, it seems inevitable that Opendoor and ibuying will be much bigger components of the massive real estate industry.

The only place you can sell your home directly today and the only place you can buy a home directly with an e-commerce like transaction is Opendoor. We have the only direct platform in the industry. So no matter how the real estate ecosystem evolves, we’re really set up well to take advantage of that.

(CEO Carrie Wheeler — Opendoor FY2024 Q1 Earnings Call)

Reason #2: Virtual Monopoly

It will take some time for this shift to happen — the real estate industry is notoriously one of the most non-tech-savvy and stubborn industries. However, given the size of the industry, it is well worth the pursuit for Opendoor.

As you can see, the residential real estate industry is by far the largest category in the US, valued at a whopping $1.9T annually.

iBuyer penetration is only about 1% of this market — Opendoor still has a long way to go. The good news is that Opendoor is virtually a monopoly with a 79% market share in the ibuying space. Following Zillow’s (Z) and Redfin’s (RDFN) exit from the ibuying market, Offerpad (OPAD) is the only direct competitor with a market share of about 20%.

With a dominant position in the market, Opendoor has a clear runway to become a much bigger company in the next decade or so. In fact, it’s already happening as I’m writing this article.

We more than doubled our market share in the first quarter versus 1Q23 and increased market share sequentially from 4Q23.

(Opendoor FY2024 Q1 Shareholder Letter)

In other news, the proposed NAR settlement is expected to drive down buyer-broker commissions, a substantial cost that Opendoor pays when the company resells its homes. As a result, this settlement should be net neutral to positive for Opendoor.

• Opendoor can pass on the savings to consumers in the form of lower spreads, increasing the attractiveness of Opendoor’s value proposition.
• Lower transaction costs for consumers mean that they are more likely to move, enabling Opendoor to capitalize on this increased volume.
• With greater fee transparency, more consumers may potentially opt to transact directly with Opendoor, instead of listing in the MLS.

All these should accelerate iBuyer penetration, solidifying Opendoor’s monopolistic position.

Reason #3: Rescaling Responsibly

In the meantime, Opendoor is rescaling its business following its taper as a result of the real estate shock a little over a year ago.

In Q1, Opendoor bought 3,458 homes. While this is down 6% QoQ, it is up 98% YoY, even despite listings in its buybox being up only 6% YoY. This is due to lower spreads embedded in Opendoor’s offers, which subsequently increased seller conversions and acquisition volumes.

As you can see, Opendoor is ramping up acquisitions gradually. In contrast, Opendoor was recklessly buying homes in 2021 and 2022, causing inventory to balloon, and unfortunately, interest rate hikes led to a housing correction and a massive inventory writedown for Opendoor.

Opendoor doesn’t want to repeat the same mistake, and so they’re taking a more sustainable and cautious approach to growing the business.

That is also reflected in Opendoor’s Q2 guide. The company expects acquisitions of over 4,500 in Q2 — a decent bump from Q1, but not an astronomical rise by any means.

That being said, this should grow Opendoor’s resale business as well.

• In Q1, Opendoor sold 3,078 homes, down 63% YoY.
• This led to Revenue of $1.2B. This beat analyst estimates by $110M and beat management’s guidance range of $1.05B to $1.1B.
• While Q1 Revenue is down 62% YoY, it is up 36% QoQ. Moving forward, expect continued sequential growth as management guided for Revenue of $1.4B to $1.5B in Q2.

The most important thing is that Opendoor is rescaling responsibly. This should translate to strong, stable unit economics, necessary for the company to achieve sustained profitability.

Reason #4: Improving Unit Economics

Q1 Contribution Profit was $57M with Contribution Profit Per Home Sold at about $19K, an improvement from $(29)K last year.

Contribution Margin was 4.8%, a 1,250bps YoY improvement. As you can see, the company’s Contribution Margin has been improving over the last few quarters, due to much lower home sales from the old book of inventory.

Excluding the old book, Contribution Margin from the new book was over 5%, and has produced its seventh consecutive quarter of Contribution Margin above or within management’s target of 5% to 7% — talk about rescaling responsibly!

And since the old book is “effectively behind us”, Opendoor expects Contribution Margin to improve further, expected to reach 5.4% to 5.7% in Q2. For the full year 2024, the overall Contribution Margin is expected to be within its 5% to 7% target.

Unit economics are improving, but Opendoor needs to scale further — because the business is still unprofitable due to high fixed costs:

• Adjusted Net Income was $(80)M, at (6.8)% Margin.
• Adjusted EBITDA was $(50)M, at a (4.2)% Margin. This is actually ahead of the high-end of management’s guidance of $(70)M, driven by higher resale volumes, improving unit economics, and ongoing cost discipline.

Moving forward, management expects Adjusted EBITDA to improve to $(35)M to $(25)M in Q2. At this rate, we could expect Adjusted EBITDA breakeven by the end of the year, which could be a major catalyst for the stock.

Whatever it is, Opendoor’s goal is to achieve Adjusted Net Income breakeven, which requires $10B of Revenue on an annual run rate basis, or roughly 2,200 homes acquired and sold per month.

As a reminder, Opendoor sold 3,078 homes in Q1, or 1,000 homes per month. In Q2, Opendoor is expected to acquire 4,500 homes, or 1,500 homes per month.

In other words, Opendoor is rescaling its business given its current healthy unit economics. It’s only a matter of time before Opendoor reaches the desired scale to generate positive Adjusted Net Income.

#5 Undervaluation

Opendoor currently trades at an EV to Revenue multiple of 0.6x which is a significant discount from its peak and average multiples of 5.2x and 1.3x, respectively.

Yes, Opendoor is unprofitable. Yes, Opendoor has negative growth. Yes, Opendoor is a low-margin business. Yes, the interest rates are high. Yes, the real estate market looks uncertain.

We all know that — that’s why the lower multiple is justified.

However, I believe the worst has already been priced in. At the same time, I believe the worst has already past.

As for me, I maintain a price target of $6 for Opendoor stock, based on the following assumptions below.

Analysts have an average price target of $2.61, which represents an upside potential of 12%.

The stock will continue to be volatile, but I believe there’s a wide margin of safety today, especially after its 50% drawdown this year.

In short, I believe Opendoor stock is undervalued relative to its market potential. In addition, the first four reasons laid out in this article show that there’s light at the end of the tunnel and that we can expect brighter days ahead for Opendoor.

Thesis

Opendoor stock has had a rough start to the year, down about 50% while the broader markets advanced 10% — It’s natural to feel discouraged and pessimistic.

Well, that’s why I wrote this article — to share with you five reasons to be bullish on Opendoor stock:

1. The company offers a superior value proposition compared to traditional methods.
2. Opendoor is a virtual monopoly in the buying space.
3. Management is rescaling the business responsibly and sustainably.
4. Opendoor is improving unit economics and focusing on profitable growth.
5. The stock offers a wide margin of safety with decent upside potential.

Maybe I could add one more reason: interest rate cuts. But that’s nearly impossible to predict — I would rather focus on the fundamentals.

That being said, risks remain, such as prolonged high interest rates, housing instability, and a busted business model that will never turn profitable.

However, it doesn’t hurt to stay optimistic about Opendoor’s future.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of OPEN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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