Warren Buffett famously told investors to "be fearful when others are greedy and to be greedy only when others are fearful." But that's usually easier said than done, and it's tough to take a firm contrarian view and buy a stock that everyone is selling.
However, investors who buy the right stock as the bulls are heading for the exits can generate some life-changing returns. Could one of those stocks be Opendoor (NASDAQ: OPEN), which has plunged 94% since its public debut nearly four years ago?
Image source: Getty Images.
Opendoor is one of the last iBuyers standing
Opendoor is an online "iBuyer" which makes instant cash offers for homes, fixes up those properties on its own, and relists them for sale on its first-party marketplace. In theory, its digital home-flipping business model streamlines the home selling process.
But in reality, it was a capital-intensive business that became difficult to sustain as interest rates rose and the housing market cooled off. Its own AI algorithms also sometimes caused it to overpay for its properties, and supply chain constraints made it tough to renovate all of those homes. That's why Zillow(NASDAQ: Z) and Redfin(NASDAQ: RDFN) both shut down their own iBuying platforms in 2022.
Opendoor, which went public by merging with a special purpose acquisition company (SPAC), held firm and remains the largest iBuyer in the U.S. It generated more than five times as much revenue as its closest competitor, Offerpad(NYSE: OPAD), in 2023.
Is Opendoor poised for a comeback?
Opendoor experienced a major growth spurt in 2021 as the pent-up demand for new houses during the pandemic's height sparked a buying frenzy in new properties. That momentum continued in 2022, but the pressure of renovating and reselling those homes boosted its operating expenses, squeezed its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins, and caused its net losses to widen.
Metric | 2021 | 2022 | 2023 | 1H 2024 |
|---|---|---|---|---|
Revenue | $8.0 billion | $15.6 billion | $6.9 billion | $2.7 billion |
Revenue growth (YOY) | 211% | 94% | (55%) | (47%) |
Homes bought | 36,908 | 34,962 | 11,246 | 8,229 |
Adjusted EBITDA margin | 0.7% | (1.1%) | (9%) | (2%) |
Net loss | ($662 million) | ($1.4 billion) | ($275 million) | ($201 million) |
Data source: Opendoor. YOY = Year over year. EBITDA = Earnings before interest, taxes, depreciation, and amortization.
In 2023, soaring interest rates chilled the real estate market and drove up Opendoor's costs of acquiring and fixing new properties. That's why it bought and sold significantly fewer houses throughout the year -- but its bottom line stayed deep in the red. That pressure continued throughout the first half of 2024, but the Federal Reserve finally cut its benchmark interest rate for the first time in four years this September.
If the Fed continues to cut rates, the housing market could warm up and generate strong tailwinds for Opendoor. It will also likely overcome its supply chain constraints, upgrade its AI algorithms to price its properties more accurately, and work with more agents, home builders, and even Zillow to reach more potential sellers.
Assuming it achieves those goals, analysts expect its revenue to grow at a compound annual growth rate (CAGR) of 10% from 2023 to 2026. They also expect its adjusted EBITDA to turn positive by the final year. With an enterprise value of $3.05 billion, it still looks dirt cheap at 0.6 times next year's sales.
But what could go wrong?
Opendoor trades at such a steep discount because it hasn't proven its business model is sustainable yet. It ended the second quarter of 2024 with $809 million in cash and marketable securities, but analysts expect it to post a net loss of $457 million for the full year.
It had a high debt-to-equity ratio of 3.0. It's already increased its number of outstanding shares by 30% since its public debut, and that dilution will likely continue as it issues more shares to raise fresh cash and cover its stock-based compensation. If Opendoor can't scale up its business even as interest rates decline, it would indicate that Zillow and Redfin made the right decision to exit the iBuying market. Its algorithm-driven offers could also face tougher competition from Zillow, Redfin, and other traditional listing platforms as more individual buyers return to the housing market.
Could buying Opendoor set you up for life?
Zillow and Redfin trade at 6 times and 2 times this year's sales, respectively. If Opendoor matches analysts' estimates through 2026, grows its revenue at a CAGR of 10% over the following four years, and trades at 4 times sales, it could be worth $55 billion by the end of the decade.
That would represent a near-18-bagger gain from its current price, and it could head even higher as economies of scale kick in. Opendoor's business could certainly crash and burn -- but it also has the potential to generate life-changing gains for bold investors who can look beyond its current challenges.
Should you invest $1,000 in Opendoor Technologies right now?
Before you buy stock in Opendoor Technologies, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Opendoor Technologies wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $829,746!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of October 28, 2024
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Offerpad Solutions, Opendoor Technologies, Redfin, and Zillow Group. The Motley Fool recommends the following options: short November 2024 $13 calls on Redfin. The Motley Fool has a disclosure policy.
