Opendoor Technologies stock: buy, sell or hold?

Opendoor technologies (OPEN 10.00%) is considered an iBuying pioneer, making instant cash offers to homeowners to make the process of selling their properties smooth.

Unfortunately, the company has not yet managed to translate the significant potential of this transaction model into a successful business. The stock has fallen a catastrophic 95% since its pandemic-era peak, reflecting recurring losses and continued weakness in the real estate market.

Still, the possibility that Opendoor finally gets its online platform system right and the market outlook improves could make the stock a winner. Despite many uncertainties in the future, the company’s recent results have shown some encouraging trends.

If you have invested in Opendoor Technologies shares or are planning to buy such shares, here are some things you should consider.

A mixed earnings report for the second quarter

The biggest challenge for Opendoor Technologies is the lack of activity in the real estate market. Industry data shows that new listings are at a ten-year low and existing home sales are well below pre-pandemic averages. A combination of high mortgage rates and still-elevated prices has presented challenges for both home buyers and sellers, and Opendoor is in the thick of it.

In the second quarter, the company sold 4,078 homes and generated $1.5 billion in revenue, down 24% from a year ago. While that headline is concerning, some context is important.

Opendoor has made progress in adjusting its unit costs, as evidenced by a contribution margin of 6.3% this quarter, offsetting a loss of 4.6% in the year-ago period. This metric captures the direct profitability attributed to the actual real estate transaction, excluding other corporate expenses such as marketing.

In this case, Opendoor earned a contribution profit of $23,000 per home sold this quarter, compared to a loss of $17,000 in the second quarter of 2023. The result helped narrow the company’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss to $5 million, compared to a loss of $168 million in the year-ago quarter. Again, that’s not great, but at least there are some signs that Opendoor is moving in the right direction.

The company plans to increase acquisitions as the real estate market normalizes. Opendoor ended the quarter with an inventory of 6,399 homes, almost double the year-ago figure. Management believes this will have a positive impact on spreads.

Image source: Getty Images.

Uncertainties on the real estate market

Opendoor Technologies could turn out to be a turnaround story, but it’s probably too early to tell. The company needs a lot of factors on the macro side and needs to get its financial results right before investors can gain confidence in its path to sustained profitable growth.

On the positive side, there is some optimism that the Federal Reserve is close to cutting interest rates. This would provide some relief to the housing market by bringing buyers back into the market. What is less clear is how housing prices will perform if lower rates increase supply as sellers also take the opportunity to get back into the market.

In a best-case scenario, Opendoor Technologies sees an increase in existing home sales nationally and rising or at least stable average sales prices as a sign of healthier market conditions. The ability to both expand and generate higher contribution margin per home sold should be positive for the stock over the long term.

If the real estate market continues to deteriorate, either due to reduced activity or a price correction, this would pose headwinds for the company and jeopardize its prospects.

Decision time for Opendoor shares

Ultimately, Opendoor Technologies remains a high-risk and speculative investment. The stock’s valuation, which traded at just 0.25 times sales last year, is justified in my opinion, as the lack of profitability is likely to persist for the foreseeable future. The market seems skeptical about the long-term potential of Opendoor’s strategy.

I believe there is a middle ground. Considering that shares have fallen more than 60% this year, I believe a hold recommendation may make sense for current investors as it is too late to sell and many of the company’s weaknesses are already priced into the share price. For investors who are considering buying the stock now, a wait-and-see approach may also make sense.