I commonly check the informed viewpoints of my InvestorPlace colleagues when I’m dealing with a brand-new company such as Opendoor Technologies (NASDAQ:OPEN). Opendoor stock began trading on Dec. 21 and while the company has a fascinating business model of buying and selling residential real estate online, I have questions. Nagging questions. Questions that would make a mountaintop guru tear his hair out and those guys are usually bald to begin with.
For example, when I hear words such as “digital” and “disruptor,” I get anxious. I think: Oh great, is this going to be another overhyped, underperforming loser? Seeking guidance, I’ve turned to Mark R. Hake, CFA and Vince Martin. They’re smart. They cast well-reasoned arguments. But for the sake of my throbbing cranium, I only wished they agreed on this one.
Writing on Dec. 16, Martin opined that Opendoor has a long way to go to prove itself: “Competition is intense. The business model is unproven. Valuation looks stretched at best, and extreme at worst.” Five days later, Hake sang the praises of Opendoor stock, which he contended was severely undervalued and worth at least 161% its Dec. 18 price of $29.50 per share.
As my therapist could tell you all about my need to be loved by everyone, I won’t take sides. But let’s see if we can at least flesh out the picture some. When it comes to Opendoor, I’m an open book.
Opendoor Stock, from SPAC to All That
Opendoor stock resulted from the reverse merger of Social Capital Hedosophia Holdings Corp. II into the former Opendoor Labs. Social Capital was a SPAC (or special purpose acquisition company) and 2020 has been a hot year for these vehicles that fund the businesses that absorb them.
But as SPACs are so SPAC-tacular, and perhaps a tad too sexy, that raises a caution flag right there. Does the OPEN ticker have a double meaning as “open for speculation?” Here, it pays to draw an analogy to Uber (NYSE:UBER).
Just as that ride hailing business upended a sector exclusively controlled by taxis and limousines, Opendoor seeks to revolutionize real estate by creating what’s called an “iBuying” platform. The gist is that by transacting online, sellers will enjoy lower fees and more precise quotes generated by algorithm. Opendoor buys and then resells the real estate, making money on the spread. Revolutionary? You bet.
The Revolution Will Be Digitized
But does revolutionary equal ready for public-trading prime time? The answer to that question depends largely on where you sit. Many here see Opendoor as a 2020 reboot of Amazon (NASDAQ:AMZN). Its stock shot to the moon in time because the onetime online bookseller caught the wave of a new consumer paradigm, e-commerce, at just the right time.
Many anticipate that the ongoing digitization of real estate marketplaces will propel Opendoor stock in a similar fashion. They point to salient facts such as the company’s revenues of $4.7 billion last year off sales of 18,000 homes.
They also get excited when they hear the magic phrase “10x,” as in a return of ten times the original investment. “These guys are my next 10x idea,” Chamath Palihapitiya said in an interview with CNBC. That’s not to be taken lightly, as he’s a founding father of the SPAC phenomenon and helped Sir Richard Branson fund Virgin Galactic (NYSE:SPCE).
And yet, a 10x idea is not a 10x reality. Or it could well be an idea that someone else realizes better. Remember the Diamond Rio? Of course you don’t. But the folks at Apple (NASDAQ:AAPL) do. They took that company’s MP3 player and turned it into the iPod. Pioneers often pave the way for fast followers to outrun and outgun them. Opendoor’s idea is unique. But it certainly isn’t patented.
What’s Behind the Door
Meanwhile, here’s what troubles me: Shouldn’t a company that operates entirely online make a killing during during a pandemic? We’ve seen Amazon orders shatter the stratosphere with the novel coronavirus. And yet, as Hake points out, Opendoor Labs lost money during the Covid-19 outbreak, which led it to raise money by going public. Its year-over-year revenue declined 12% in the first half of 2020, while it lost $118 million. Huh?
Keep in mind, Hake remains bullish on OPEN. And I agree that Opendoor stock has tremendous potential. If he’s is right, we’re going to see prices explode as we head into 2021 because shares are indeed undervalued. And yet, you can look up the dozens and dozens and dozens of enthusiastic cases made for Uber and Lyft (NASDAQ:LYFT) prior to their lemon-sucking IPOs.
Caution, then, my fellow investors. Get in on the ground floor if you must. In hindsight, that may turn out to be one mighty fine idea. But a company without a track record in a niche without a track record — especially in an age where too many people buy shares based on herd mentality or a cult of personality — should set off an alarm bell, even if it eventually turns out to be a false alarm.
Thus remains for me one unanswered question: Why did such a mighty, magnificent online real estate company lose money during the pandemic, especially as sales skyrocketed elsewhere? Existing home sales shot up 25.8% year over year in November alone, according to the National Association of Realtors.
Look at that enlightened investment guru, way up on yonder mountain o’ money. He boasts an open mind. But when it comes to Opendoor stock, he does not yet have an open wallet.
On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article.
