Ever since Opendoor Technologies (NASDAQ:OPEN) stock fell to a low of around $14, its rally following its quarterly results is holding. It’s been trading around $24 for the last few days.
On the chart, OPEN stock triggered a multiple bottom signal between May and August. The bottom is around $15. It indicates strong support and an unlikelihood of falling there again.
To continue its climb above its positive moving averages at $19 – $22, Opendoor will need to post strong results on Nov. 10. What should investors expect in the third quarter?
On Aug. 11, Opendoor announced Q2 results. It posted revenue growing by 59% sequentially, to $1.2 billion. It sold 41% more homes, or 3,481 total homes, from Q1/2021. Gross profit and net income both improved.
For the third quarter, Opendoor said revenue will be between $1.8 billion to $1.9 billion. EBITDA (adjusted) is in the wide range of $15 million to $25 million.
The company had one negative event that should have hurt OPEN shares. This did not happen.
On Aug. 18, Opendoor upsized its senior notes offering to $850 million. The company is paying just 0.25% on unsecured notes due on Aug. 15, 2026.
Shareholders view this low cost on debt as a positive development. Furthermore, the conversion price is $19.23 a share.
Opendoor gets a very good deal on the offering. That it found lenders at a modest premium is a bullish signal for investors.
Zillow’s Troubles and OPEN Stock
Reports that Zillow (NASDAQ:Z) would pause its home-flipping service should benefit Opendoor.
Bloomberg reported that Zillow is beyond operational capacity. The Zillow spokesperson said that the company is “not taking on additional contracts to purchase homes at this time.”
Zillow could have taken too many properties. It took advantage of the low cost of capital but under-estimated operating costs. For example, refurbishment costs are rising while the rate of unit sales is falling. Higher interest rates are on the way and will magnify the rate of the sales slowdown.
Opendoor may benefit from Zillow’s stumble. It has low costs of capital. Still, the firm has plenty of work ahead. It posted a gross margin of 13.4% in the second quarter.
It will need higher profitability as it expands in more markets. In Q2, Opendoor expanded to 39 markets and entered 12 new markets. Inventory was $2.7 billion.
Chief Executive Officer Eric Wu said that the company benefits from the strong progress of its offerings. Opendoor Backed Offers, for example, benefited from rapid adoption.
CEO Wu said that “for every two homes we sell, we’re seeing one customer say yes to Buy with Opendoor, which is part of our flywheel.”
Bundled services will add meaningfully to results. Opendoor invested heavily in its platform to build a digital one-stop-shop. It integrated title and escrow in 2017. More recently, it launched Buy with Opendoor and home loans. That will position the firm to connect all its services in-house.
Consumers will get a better experience, thanks to all of the services supplied in-house.
Risks and Fair Value
Opendoor faces risks of slowing sales if interest rates rise soon. Mortgage rates will increase, hurting purchasing power. Fortunately, the Federal Reserve keeps mentioning a rate hike. It has yet to act on that.
The Fed does not want to hurt the stock market. So long as it views inflation as transitory, rates will not rise and tapering will not slow.
Opendoor does not flip property. Instead, it renovates the property and records the profits. As long as the property’s appreciation outpaces operating costs, the company will post positive margins.
On Wall Street, analysts have a price target in the range of $25- $40, according to Tipranks. The average price target is $31.67, or an upside of up to 35% based on a $23.39 closing price on Oct. 22.
Opendoor’s stock score is fair to poor. The overall score is 17/100, due largely to a weak value score.
The stock market values real estate services firm at around seven times price-to-sales. By comparison, a traditional firm like CBRE Group (NYSE:CBRE) trades at a 1.39 times P/S.
Your Takeaway
Opendoor already rallied back to levels not seen since March, ahead of the quarterly report.
Cautious investors may want to wait for the company to meet expectations. It may express caution ahead, as it plans for moderation in housing demand.
Conversely, if management beats estimates and raises its guidance, the stock will head back to 52-week highs.
On the date of publication, Chris Lau 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.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
