Opendoor Technologies (NASDAQ:OPEN) is well off its highs this year but looks like it is quite undervalued. I estimate OPEN stock is worth at least 54% more than its recent price.
People are returning to buying and selling their homes and this expanded activity will help Opendoor’s value.
As of May 19, OPEN stock was down 31.9% for the year-to-date at $14.59. It was also down over 53% from Dec. 21 when it went public, ending at $31.25 on its first day. It is down 28% in May already and its downdraft seems to be well overdone.
Recent Results and Guidance
On May 11, Opendoor, which buys and sells homes for its own account as well as provides loans to buyers, reported its first-quarter earnings. It certainly is on the mend. Revenue jumped 200% over the prior quarter. Its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) losses improved dramatically to just $2 million (almost profitable).
Moreover, Opendoor is dramatically growing its inventory of homes. It raised $860 million during the quarter and now has $2.1 billion in cash and securities.
As it grows inventory, it uses up cash. That is why it produced negative free cash flow (FCF) of $408 million during the quarter. But as revenue reaches its peaks and growth slows, the negative cash flow will slowly turn to positive cash generation.
I suspect that the company has good prospects of not only reaching but exceeding its peak quarterly revenue of $1.255 billion from Q1 2020. That would be a gain of 67.9% over the $747.3 million in Q1.
In fact, management gave guidance for Q2 that moves it significantly closer to that target. They indicated that Q2 revenue would be in the range of $1.025 to $1.075 billion. That alone represents gains of 37% to 43.8%.
In Q1 2020 Opendoor had a huge increase in its free cash flow to $430.7 million. That represented a very high FCF margin of 34.3%. Granted, this was based on a drawdown in its inventory. But I suspect that if the company reaches this level again, it will also have positive FCF. However, it might not be as high as in Q1 2020.
What Opendoor Is Worth
Opendoor has a market capitalization of $8.84 billion as of May 19. Given that analysts estimate revenue will hit $4.7 billion this year, that gives OPEN stock a price-to-sales (P/S) multiple of 1.9 times.
With revenue forecast to be $8.62 billion in 2022, that P/S ratio will be 1.026 times for 2022. This is very cheap. It assumes that quarterly revenue will exceed $2 billion per quarter. Even if revenue hits $1.255 per quarter (the previous peak in Q1 2020), it would be $5.02 billion annually. That still puts its P/S multiple at 1.76 times (i.e. $8.84 b/ $5.02 b).
If the company does indeed achieve $5 billion in sales, it should be worth at least 2.5 times to 3 times sales. This puts its value at $12.55 billion to $15.12 billion. That is 40.4% to 69% higher than today. The midpoint of that is $13.835 billion, or 54.75% higher than today. This is equivalent to $22.58 per share (i.e., 1.5475 x $14.59).
What to Do With OPEN Stock
Analysts that cover the stock put its value much higher than my target price. For example, Seeking Alpha indicates that seven analysts cover the stock. Their average price target is $32.17. That is much higher than my midpoint target price of $22.58.
As well, TipRanks.com reports that five analysts have written on OPEN stock in the last three months. Their average target price is $29, with a high forecast of $40. Their midpoint price represents a potential gain of 98.8% over the present price.
Therefore, analysts are much more ebullient on the stock than I am. Either way, look for OPEN stock to rise at least 54% to $22.58 over its present very low valuation.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.