When the greatest stock bull market comes to an end, the rubble left in investor’s portfolio by this nuclear event will be littered with failed special-purpose acquisition companies (SPACs). Some will likely be fantastically successful, while others will flame out and never recover their highs — particularly those associated with Chamath Palihapitiya.
One that will likely fall into the latter category is Opendoor Technologies (NASDAQ:OPEN) stock. For those who don’t already know, Opendoor is essentially a high-tech house flipper. Not exactly a revolutionary real estate business concept, OPEN hopes to digitize the house buying and selling process in a way that benefits consumers.
Opendoor is a digital company for transacting in residential real estate. It makes instant cash offers on homes through an online process. It makes repairs on the properties it purchases and relists them for sale. It also provides mobile application-based home buying services along with financing.
The company operates in 21 markets in the U.S. The company boasts of a digital, “contactless” way to buy and sell a home. But as glamorous as all of that sounds, it’s still not enough to save OPEN stock.
On September 15, 2020, a SPAC called Social Capital Hedosophia Holdings Corp II announced its intent to merge with Opendoor. The deal valued Opendoor at an enterprise value of $4.8 billion. On December 17, 2020, shareholders approved the merger and on December 21, 2020, the merger was finalized and the company began trading under the ticker OPEN.
With all of that history in mind, here’s a closer look at some of the core issues that plague OPEN stock moving forward.
OPEN Stock: Financials Still Show Start-Up Mode
In 2019, OPEN’s revenues rose to a record $4.7 billion. Yet its net loss for the year was $341 million. The Covid-19 pandemic hurt revenues in 2020, as large consumer purchases slowed significantly. Revenues last year were down to $2.6 million.
Analysts expect the revenues to rebound to $6.7 billion this year due to the continuation of low interest rates and the economic rebound from last year’s pandemic-induced slowdown. The company is poised to report massive losses of over $600 million this current year, largely due to stock compensation. But as noted previously, stock compensation is a real expense.
Originally, the company projected roughly breakeven EBITDA in 2023, which was obviously a long way from earning a positive return on equity. However, in the second quarter earnings report, the company stated:
“When we look at our second half trajectory, it’s helpful to put into context the acceleration we have seen in our business year to date. At our current momentum, our second half revenue run rate is on track to meet the 2023 target that we provided at the time of our public listing. We have effectively pulled forward our financial plan by two years on both the top and bottom lines.”
No comments were made on the expectation for when GAAP net profits my occur. Some analysts and commentators feel the “contribution margin” is important. This is essentially profits on a cumulative per home basis. Although eliminating large SG&A and R&D expenses may not be the best example of complete and thorough company analysis.
Cash Position Burdened by Debt Levels
Opendoor has $1.75 billion in cash and unrestricted securities as of June 30, 2021. However, total debt balances stood at $2.29 billion. The company has been using debt to purchase housing inventory for resale. Usually the large cash positions in start-up companies
Start-up growth companies with this much cash usually use the funds to fund large operating losses. This is true for OPEN, but the need to purchase homes to generate the growth expected by investors requires high levels of liquidity — either cash or available debt.
OPEN Has No Competitive Advantage or Moat
Another issue tainting the bullish case for OPEN stock is the fierce competition it must contend with in its industry. There are many online players competing in the same space. Each of these competitors claims to have a new bell and whistle that will “revolutionize” the home buying industry. Even so, real estate agents are still generally preferred by most people due to the inherent hand-holding required for what will be most consumers’ largest family purchase.
When mortgage rates go up eventually, this large-scale home flipping business will turn into a game of musical chairs. Who is going to be left holding the bag? The bag in this case being billions of dollars in purchased home inventory, which increased to $2.7 billion at end of Q2 2021 (a 224% increase over Q1 2021).
Opendoor also announced that it is under contract to buy an additional 8,158 homes. Collectively, these homes are worth approximately $3 billion in value. When homes become unaffordable and higher rates make it impossible to buy homes at prevailing prices, someone will be holding that rapidly declining asset base.
Lessons Learned From Former Citigroup CEO Charles Prince
In 2007, former CEO of Citigroup Charles Prince actually told the Financial Times that the real estate party would end at some point. He said there was so much liquidity it would not be disrupted by the turmoil taking place in the U.S. subprime mortgage market.
He denied that Citigroup, one of the biggest providers of finance to private equity deals and mortgage-backed securities, was pulling back:
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
Well the music did stop and the company no longer danced and the stock fell over 95% from its highs. Likewise, the music will stop for OPEN stock at some point as well.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other investment related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University. He also created the 406dad.com kids adventure blog.