Investors Should Avoid Opendoor Stock

As multiple other stock bloggers have pointed out, Opendoor Technologies (NASDAQ:OPEN) has multiple, positive attributes. Nonetheless, the company’s low profit margins, tough competition, and the relatively high valuation of OPEN stock lead me to recommend that investors stay on the sidelines on this one.

A picture of the OpenDoor (OPEN) app on a phone.

And adding to my caution are credible allegations made against Clover Health (NASDAQ:CLOV). Since Opendoor, like Clover, was brought to market by Chamath Palihapitiya, the latter’s involvement in Opendoor also increases my wariness towards it.

Positive Attributes

Another InvestorPlace columnist, Luke Lango, identified some of the company’s strengths in his April 16 article. He noted that the number of people visiting the company’s website surged 57% year-over-year in the first quarter, while the company should get a boost from the on-fire U.S. housing market. Finally, he noted that Opendoor greatly simplifies the selling process.

Meanwhile, Seeking Alpha columnist Jay Wu noted that the company’s top line soared 570% from 2017 to 2019.

Low Profits and Tough Competition

But on the other hand, another Seeking Alpha writer, Michael Wiggins De Oliveira, notes that, despite the company’s huge revenue increases, its Q1 EBITDA, excluding certain items, is expected to be -$28 million, unchanged versus the same period a year earlier.

So, despite being in business since 2014, Opendoor remains unprofitable. Given the company’s tough competition, that may not change anytime soon. According to Wiggins De Oliveira, three other sizeable companies also use technology to quickly buy and sell homes: Zillow (NASDAQ:Z), Offerpad and Redfin (NASDAQ:RDFN).

I believe that Zillow has a much stronger brand than Opendoor, while Redfin’s brand power is roughly equal to that of Opendoor.

Meanwhile, I don’t have any reason to believe that any of these companies are using proprietary technology that can’t be easily replicated. Therefore, I would not be surprised if Opendoor’s competition continues to surge in the coming years.

Palihapitiya’s Involvement With OPEN Stock

In a Feb. 26 column on Clover Health, I reported on allegations leveled against that company by short seller Hindenburg Research. Among other charges, the firm alleged that Clover was under investigation by the Department of Justice and that its software is a tool to help the company obtain money from Medicare using irrelevant diagnoses.

Since Palihapitiya backed both Clover and Opendoor, and Clover has been hit with credible, damaging allegations, Palihapitiya’s sponsorship of Opendoor makes me slightly more cautious on OPEN stock than I otherwise would be.

Interest Rate Risk

I believe that the Street is overly worried about the impact of higher interest rates on the tech and clean energy sectors. Many companies in those sectors can grow quickly enough to make interest rate hikes mostly irrelevant.

But as is well known, the housing sector is extremely sensitive to interest rates. With most experts saying that inflation is bound to accelerate, at least for a while, we could within the next six months easily see a sudden jump in rates that would greatly slow down the housing market. At that point, OPEN stock and other names tied to the housing space are likely to dive.

Valuation and the Bottom Line on OPEN Stock

Despite Opendoor’s tough competition, the absence of a strong moat, and lack of profitability, the shares are trading at a rather high 4.6x the company’s 2020 revenue, according to data obtained from Yahoo Finance.

That intense competition and lack of profitability, along with the strong possibility that its competition will meaningfully intensify, make the name quite risky. Meanwhile, the allegations against Clover Health and the possibility of an interest rate hike in the medium term make me more cautious on OPEN stock.

In light of these points, I recommend that investors sell the name.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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