Few stocks have imploded as badly in recent years as Opendoor Technologies (NASDAQ: OPEN).
The company went public through a special purpose acquisition company (SPAC) in late 2020 at the height of the pandemic tech stock frenzy.
The real estate market was on fire back then, as were real estate stocks, and Opendoor jumped out of the gate. However, as tech stocks went into a bear market in 2022 and the housing market froze as interest rates surged, Opendoor plunged.
Opendoor stock is now down a whopping 95% from its peak in 2021. However, there's a silver lining to the stock's retreat over the last three years. Competition has thinned out in the home-flipping sector. Both Zillow and Redfin closed their homebuying operations, leaving Opendoor as the clear leader in the iBuying industry, though the company still competes with other pure plays like Offerpad.
The housing slowdown has also forced Opendoor to slim down and get more efficient. The company imposed several rounds of layoffs, scaled back its home purchases, and cut other overhead costs.
As a result, the company has made progress in moving toward profitability, potentially setting it up for gains in the housing recovery. But can the stock 10x? At its current market cap of $1.3 billion, that would mean climbing to a market cap of $13 billion, which is still significantly below its peak in 2021.
Let's take a closer look at Opendoor's prospects.
Image source: Getty Images.
A housing recovery is on the way
Like other online real estate stocks, Opendoor's business is highly sensitive to the state of the housing market, and with existing home sales still down roughly 40% from before the pandemic, there's a lot of room for recovery.
Even as the sector headwinds have been substantial, Opendoor is improving its business. Its gross margin reached 8.5% in the second quarter (ended June 30), which was up from 7.5% in Q2 2023.
While a single-digit gross margin might sound like a problem, you have to remember that Opendoor is buying and selling homes, big-ticket items, so it could turn a profit with a single-digit gross margin.
Mortgage rates have eased from their peak a year ago, but there's still a lot of room for them to come down as the Federal Reserve just started lowering interest rates. Lower mortgage rates should help reignite interest in the housing market among both buyers and sellers as it will make it easier for sellers to sell their homes and buy something new.
Opendoor is also rebuilding its home inventory, which was the highest it's been in the last five quarters at the end of Q2, which should serve the company well if home prices start increasing again.
Opendoor makes money from commissions and fees on purchases and sales, but it also benefits from rising home prices, so it should perform better in a normalized housing market.
What it would take for the stock to 10x
Working backward from a $13 billion market cap, it's possible to figure out a reasonable set of financial results that would justify that valuation.
Opendoor reported $1.5 billion in revenue in the second quarter, or an annual run rate of $6 billion on about 4,000 homes sold. Let's assume Opendoor can double its revenue in a healthier housing market to $12 billion. If it maintains its gross margin of 8.5%, it would have roughly $1 billion in gross profit. Right now, it's spending about $800 million a year on operating expenses, primarily on sales and marketing expenses. If it held that flat, the company would generate $200 million in annual operating profit.
At that level, it would need a high multiple to earn a $13 billion market cap, which would be 65 times operating profit, but it's possible if the company is growing fast enough and the housing market is thriving.
Alternatively, Opendoor certainly has the potential to more than double revenue or expand its gross margin beyond 8.5%, which would help increase profits and boost the share price.
Is Opendoor a buy?
Opendoor stock has yet to respond to the Fed's rate cuts as shares still trade for less than $2 a share, indicating investor skepticism in a recovery.
It's still a high-risk stock, and the company has yet to prove that its business model works. Even in a healthier housing market, the stock could underperform or even fall. But if you're looking for high potential return, Opendoor does have the potential to soar if it can execute on that opportunity. Keep your eye on the bottom-line results as the housing recovery plays out.
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Jeremy Bowman has positions in Redfin. 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.
