Hold Off on Buying Opendoor for Today

Stock Market
  • Bears are justifiably betting against Opendoor
  • Opendoor (OPEN) has a strong distribution model in real estate
  • Expect continued customer growth
Source: Tada Images / Shutterstock.com

After the Nasdaq’s bubble popped slightly, speculators that followed online residential real estate are having second thoughts. Opendoor Technologies (NASDAQ:OPEN) is one of such firms trading at lows for the year. OPEN stock continued its long-term decline after the company posted losses in the quarter. Its revenue exceeded analyst estimates by a wide margin.

Investors no longer care about revenue growth. Opendoor is under pressure to demonstrate profits.

OPEN Opendoor Technologies Inc. $8.65

Bears Bet Heavily Against OPEN Stock

Short-sellers have a heavy bet against OPEN stock. Despite trading well off its 52-week high of $25.33, the short float is still nearly 15%. Bears are also betting against real estate service firm Redfin (NASDAQ:RDFN). Zillow (NASDAQ:Z), the biggest company by market capitalization, is also a bear’s favorite. Though the online real estate is slumping, OPEN stock has several potential catalysts.

Higher interest rates will raise the cost of borrowing and weaken demand. Opendoor’s business model may potentially thrive in this environment. It is bringing much-needed efficiency to the real estate market. Sellers will appreciate the cost savings that Opendoor offers. At a Morgan Stanley conference, Co-Founder, CEO & Chairman Eric Wu said the company has three strengths.

First, it has a strong product that fits the real estate market. Second, Opendoor understands its distribution model. It knows how its product fits the market. Third, it has a strong business model.

Traditionally, the real estate market may have properties listed for one hundred days. Uncertainties arise from the hassle of repairs and negotiations between buyers and sellers. Agents collect a sizable fee at the seller’s expense. Businesses like Opendoor try to bridge this communication gap by offering an easy-to-use product that conveniently connects buyers and sellers.

Strong Distribution Model

Opendoor relies on its user-friendly platform to grow listings. For example, it aims to have no more than 140 characters describing the product written in 30 seconds or less. Sellers need to exert minimal effort listing their property online. As the company attracts more customers this way, its platform value increases. Homebuyers will have more sellers to consider, increasing Opendoor’s user base.

The company has plenty of competition in the real estate space. To minimize that pressure, it partnered with Realtor.com. As a result, this strengthened its distribution. Still, if competition heats up and demand weakens, Opendoor may adjust its business model. It will lower its fees to acceleration user adoption. When it started, Opendoor charged around 15% for its services. After lowering its costs, it also reduced its charge. This increased its conversion rate.

Despite the company’s strong business model, investors cannot ignore the macroeconomic risks. Interest rates rose by just 25 basis points in the last month. Banks followed by raising mortgage rates. This may weaken home ownership demand as the central banks increases rates further. In addition, home supplies are too low, unable to meet demand. The low home supplies will constrain Opendoor’s transaction volumes, limiting its revenue potential in 2022.

Opendoor Aims to Grow Customer Base

Limited home sales are a headwind. Still, the company may expand operating margins by offering bundled products to its customers. Furthermore, Opendoor has a one-click experience that its users like. Opendoor also benefits from its collaboration with multiple listing services. For example, users will get the same dashboard and experience while viewing an MLS home.

Many new users find Opendoor from physical signage. They drive around neighborhoods to discover homes for sale. It will get at least five to 10 registered buyers per home listed. In effect, it registers those users without incurring any marketing costs. Once homebuilders address the supply shortage, Opendoor’s user demand growth will accelerate at a faster rate.

In the table on the right, Opendoor scores poorly on value. The 15/100 score will not improve unless either the share price falls or operating earnings rise. In the next few quarters, homebuilders need to increase output. This will give buyers more options, driving user registrations higher on Opendoor’s site. Revenue growth will accelerate, lifting OPEN stock value and share price should this happen.

Speculate on OPEN Stock Tomorrow

The supply constraints in the real estate market will limit Opendoor’s profit potential. Cautious investors should wait for the Federal Reserve’s interest rate hike policy to ease. Until mortgage rate costs stop rising, OPEN stock will have limited upside for speculators. Therefore, consider holding off on buying Opendoor for now.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.

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