Online real estate operator Opendoor Technologies (NASDAQ:OPEN) is among the many companies that have come public through a special purpose acquisition company, or SPAC. Those involve merging into a publicly traded shell. OPEN stock has certainly done quite well since its debut, going from $10 to $27 and the market capitalization is about $15.8 billion.
Now there has been some downward pressure lately. After all, the overall markets have been volatile, especially for red-hot tech companies.
But this is to be expected. Given the speculative activity – say with the “meme” stocks like GameStop (NYSE:GME) and AMC (NYSE:AMC) and the high valuations – the environment has certainly gotten frothy.
So, for OPEN stock, what now? Is the timing right for a purchase or should investors hold off?
Well, let’s take a look.
The Latest Earnings
Opendoor’s founders include veteran Silicon Valley entrepreneurs and venture capitalists. They are Eric Wu, who sold his prior company to Trulia and Ian Wong, who was a top AI engineer at Square (NYSE:SQ). Then there was Keith Rabois, who is a top venture capitalist.
In 2014, they pioneered the category of iBuying. This involves making cash offers for homes so as to speed up the transaction process. Opendoor has also added on other functions to the platform like title and escrow, home loan services and so on. With this model, the company has been able to charge lower fees to its customers.
Now the company has recently published its first quarterly results as a public company. Note that there was actually a 45% plunge in revenues for the past year to $2.6 billion. As should be no surprise, there was an adverse impact from the Covid-19 pandemic. Yet the company was able to make progress in cutting costs. In the quarter, the net loss declined from $339.2 million to $286.8 million.
Here are some other highlights:
- The company was able to build a completely contactless system for customers.
- The gross profit margins came to 15.4%.
- There was a tripling of the inventory of homes to 1,827 for a total value of $466 million.
Although, perhaps the most important announcement was the aggressive expansion plan to expand the footprint to 42 markets this year. The ultimate goal is to get to 100 of the top markets in the U.S.
While Opendoor has been quite successful in getting to critical mass and building a large presence, there are still challenges. The increase in interest rates could dampen real estate activity. Then there are the high prices for homes. For example, last year they rose by 10.4%, according to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index.
Given that Opendoor shells out large amounts of capital for home purchases, the company could be at risk if there is a slowdown.
But another issue is the competitive environment. Let’s face it, in today’s market it is not hard to raise huge amounts of capital. As a result, there are a variety of players gunning for the iBuying category, such as Zillow (NASDAQ:Z), Redfin (NASDAQ:RDFN) and Offerpad.
Of these, Zillow could be the most dangerous for Opendoor. The company has the benefit of a massive digital platform. To this end, it has combined its popular Zestimate system with Zillow Offers for certain markets.
Bottom Line On OPEN Stock
The market opportunity is enormous for Opendoor. The company estimates the size at a whopping $1.6 trillion. This compares to $841 billion for autos and $1 trillion for food sales.
And yes, Opendoor has been innovative and is looking at expanding into new markets. There is also the addition of new services. Some that are planned include home warranty, upgrades, remodeling, home insurance and moving services.
But despite all this, investors may want to be cautious. The valuation remains stretched at 6.1x sales, especially given that the growth could slow down because of the macro factors and the competitive pressures.
Thus, for now it might be better to wait for a better price.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.