One of the more popular initial public offerings via a merger with a special purpose acquisition company, Opendoor Technologies (NASDAQ:OPEN) fronted an intriguing proposition: leverage the power of digitalization to sell or secure your next home. Given that paperwork for traditional real estate transactions is incredibly onerous, a much-needed solution undergirded OPEN stock.
But then, just like the telehealth industry, Opendoor found itself as one of the few beneficiaries of the novel coronavirus pandemic. With Covid-19 raging seemingly out of control for most of last year, few people wanted to be in close quarters with strangers. Naturally, the public health crisis also incentivized sellers to close down would-be open houses. It was simply too risky.
However, through Opendoor’s services, both buyers and sellers could perform real estate transactions in a contactless manner. With video walkthroughs, instantaneous offers for selling homeowners and a distinct scheduling mechanism that allows flexibility in closing dates, this was one of the most relevant companies in the new normal. Not surprisingly, OPEN stock garnered serious investor interest.
Also, I don’t think it’s a coincidence that OPEN stock peaked on Feb. 11 of this year. As you know, prior to the Super Bowl, Covid-19 cases soared to unprecedented levels. Of course, this sparked concern that various celebrations across the country could become super-spreader events. Therefore, investors theorized that more Covid restrictions were on the horizon, which cynically supports Opendoor shares.
For what it’s worth, I thought it was a reasonable assumption. However, the vaccine rollout proved to be an incredibly powerful catalyst — far more powerful than I gave it credit for. With new infections tumbling, this was great news for society.
Unfortunately, it wasn’t exactly the circumstance that proponents of OPEN stock were hoping for. Here’s why.
Economic Imperative Shifts Unfavorably for OPEN Stock
Perhaps several years down the line, history might look back at this time as not one of bubbles bursting due to fundamental reasons but rather, extraordinary disruptions to supply-demand dynamics. We saw that with the telehealth industry. For instance, Teladoc Health (NYSE:TDOC) was clear pandemic winner. But recent trends suggest a different narrative: no pandemic, no upside.
True, no one knows what will happen to OPEN stock in the near term. But over the long run, the plot for the underlying company seems headed for an undesirable outcome. The less-serious that Covid-19 becomes — and the more people get used to the crisis — the worse for Opendoor’s business model.
After all, there’s no such thing as a free lunch. The pivotal reason why clients chose Opendoor rather than traditional outlets is because of convenient contactless dealmaking. But without an onerous health threat — or if people become accustomed to the crisis — Opendoor loses its prime marketing message. That can’t be good for OPEN stock.
Adding to the pressure is that the housing market is out of whack. You can just look at the total revenue for real estate brokerages. In the fourth quarter 2020 and Q1 2021, the year-over-year increase in revenue averaged 24%. Typically, the YoY sales increase for the real estate brokerage sector is slightly less than 10%.
So a doubling of revenue when nothing fundamental changed outside of the pandemic’s impact on housing supply implies that the current bubble is not sustainable. Yet people are buying homes in large part because they see no other alternative.
In that case, the directive is all about saving money wherever possible. If that means more paperwork, so be it. But this circumstance would then be problematic for OPEN stock due to underlying business loss.
Digitalization Loses Its Luster
“We are transforming what has historically been a complex, uncertain, time-consuming and mostly offline process into a simple, online experience,” CEO Eric Wu told shareholders in yesterday’s Q3 earnings release.
Okay… and while the convenience angle for digitalization in real estate will always draw some folks to Opendoor, increasingly, the cost needed to pay for such digitalization is something that consumers are choosing not to bear.
And don’t think this is just a dynamic associated with OPEN stock or real estate in general. Rather, you’re seeing this play out with companies like Amazon (NASDAQ:AMZN). While the inherent contactless nature of e-commerce catapulted sales for Amazon and similar online platforms, even these digital sales trends have declined as society became acclimated to the pandemic.
In other words, as people become less fearful of Covid, they’re less willing to pay for digitalized services, which are often more expensive than their in-persona analog counterparts. Therefore, I will be on the sidelines unless the pandemic really gets ugly — which to be fair is not out of the realm of possibility.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.