Opendoor (NASDAQ:OPEN) is a startup business engaged in buying and selling residential real estate online. Though competitors Zillow and Redfin followed similar models for a short time, both found the business of buying homes to be more difficult and less profitable than anticipated.
As the last of the group left, Opendoor has suddenly seen its share prices soar by over 1,200% in the last three months. Why is Opendoor rising so quickly, and where could the stock be five years from now?
Why Is Opendoor Up So Much?
Opendoor has gotten caught up in a renewed meme stock trend that has seen it, Wendy’s, Kohl’s and a few other struggling stocks soar without proportionate improvements in the underlying businesses. The bullish thesis focuses heavily on the exits of Zillow and Redfin from the online buying market, as Opendoor now acts the last major business in this space.
This meme boom was ignited early on by Canadian hedge fund manager Eric Jackson. Earlier this year, Jackson voiced his opinion that Opendoor was worth $82 per share on a long-term basis, sending the already-hot shares higher.
Jackson has since kept advocating for his value thesis in Opendoor and its ability to become a major force in US real estate. More recently, he has also kicked off a similar trend in shares of Better Home & Finance.
Opendoor’s proponents also make much of the business’s potential in the event of an eventual rebound in the real estate market. It’s worth noting that there could be something to this, especially with the Fed already bringing down interest rates in a move that could stimulate the housing market.
Even so, fundamental challenges remain in Opendoor’s business model. More bearish voices have been quick to point out the difficulty of making online buying and selling of residential property economically viable.
It’s also worth noting that the bullish views driving Opendoor up require it to scale enormously, something it hasn’t demonstrated an ability to do thus far. Unless the business can massively increase the number of homes it’s buying and selling, the value argument that bulls put forward will likely fall flat.
Opendoor Revenues Up Slightly
Opendoor is currently experiencing some revenue growth, though nothing like what one might expect from the quadruple-digit increase in its share prices.
In Q2, revenue rose 4 percent year-over-year to $1.6 billion. The number of homes sold, meanwhile, rose 5 percent from the year-ago quarter. The business did experience a fairly significant narrowing of losses, but it still lost $29 million during the quarter. Gross margin, meanwhile, came in at a fairly lackluster 8.2 percent.
While sales were slightly up, Opendoor has had a more difficult time replenishing its inventory. Last quarter, the business purchased just 1,757 properties, a drop of more than 60 percent from the year-ago quarter. Total inventory, meanwhile, was down 32 percent.
Opendoor also has about $2.3 billion in total liabilities, compared to just $789 million in cash and cash equivalents. Though utilizing debt allows Opendoor to more efficiently buy and sell properties, it also creates an additional risk that could turn against the business if the housing market remains depressed for too long.
On the whole, Opendoor is making some progress toward improving itself as a business. Cost-cutting measures, in particular, have helped to slow its rate of losses. The problems of a less-than-ideal housing market in which to operate and ongoing losses, however, still appear to be major negatives in its overall picture.
Opendoor’s 10x Cash Flow
At 1.0 times sales and 10.0 times operating cash flow, Opendoor’s price doesn’t look outrageous to begin with. Considering the steep losses, questionably viable business model and lack of strong near-term tailwinds, however, there’s still a fairly good chance that OPEN is overvalued after having surged so much in the past few months.
Opendoor is also still priced at 8.3 times its book value, a substantial premium compared to the sector average of just 0.8.
Despite intense enthusiasm from retail investors, analysts aren’t especially optimistic about Opendoor’s prospects. The consensus price target for the stock is just $1.14, implying a downside of more than 80 percent from the most recent price of $7.09.
The highest price target is just $2.00, suggesting that even by bullish standards the stock has run well beyond its fair value. It’s also worth noting that despite still having a consensus rating of hold OPEN doesn’t have a single standing buy rating.
Where Will Opendoor Stock Be In 5 Years?
With shares skyrocketing on retail investor sentiment, Opendoor’s near-term stock performance is likely to be both extremely volatile and largely disconnected from the business’s underlying results.
Such meme stock run-ups in the past have almost universally been followed by rapid losses, and it seems likely that Opendoor could follow this pattern. If this proves to be the case, investors who pay today’s prices could see very steep losses.
This isn’t to say, of course, that Opendoor has no chance of turning its business around. The lack of competition and a lower interest rate environment could both produce improvements in Opendoor’s performance.
Given how much the stock has run up on little more than speculative enthusiasm and how much difficulty Opendoor and other firms have had making the online home buying business work, though, it seems more likely than not that OPEN will be lower in five years than it is today.
Indeed, the stock already seems to be giving up some of the ground it has gained. Despite sitting on massive 3-month returns, the stock is down more than 20 percent in the last five days. This could indicate that the momentum behind OPEN is already running out, a fact that could make now a particularly dangerous time to buy.
Some of this may even be the result of Eric Jackson’s pivot toward Better Home & Finance, as many investors may be piling into that stock instead of Opendoor in hopes of getting in early on the next surge.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.