Digital residential real estate site Opendoor (NASDAQ:OPEN) still looks like good value, despite the huge gains OPEN stock has made recently.
As I wrote in my article on September 28, Opendoor’s excellent earnings in Q2 combined with its huge buying program and rising real estate prices means higher profits.
OPEN stock is up 67% in the past two months, moving from $14.47 on August 18 to $24.10 as of October 19. However, year-to-date (YTD), the stock is up just 6.17% from $22.70 at the end of December 31.
I think these gains will continue. This is because OPEN stock could move substantially higher with higher forecast profits.
Where Things Stand With Opendoor
Opendoor’s Q2 revenue was up 59% over Q1 to $1.2 billion, with 41% more homes sold than the prior quarter. Moreover, its adj. net income became positive at $2.5 million, up from negative $21 million in the prior quarter.
Moreover, its EBITDA profits (earnings before interest, taxes, depreciation, and amortization) also became positive at $26 million. This is up from a negative $2 million in the prior quarter as well.
By the end of Q2 Opendoor had a massive balance of $2.7 billion in homes that it had acquired. In addition, it had contracts to acquire $3 billion more homes.
Valuing OPEN Stock
Let’s assume this $5.7 billion balance of homes appreciates by 20% over the next 2 years. That provides an automatic gain in net income of $1.14 billion over that period or $570 million annually.
In addition, each quarter the inventory balance is likely to rise by another $3 billion to $3.5 billion. That means that over the next year the company will acquire $12 to $14 billion in homes.
If that balance grows by 20% over 3 years, then total profits could be $4.2 billion or $1.4 billion annually. Given that OPEN stock has a market cap of $14.6 billion, this represents just over 10 times implied earnings annually (i.e., $14.6b/$1.4b).
These are gross profit numbers and do not include overhead. On the other hand, if the company borrows any amount to buy these homes, the leverage effect will compound its profits. So it serves as a rough model of how to model the stock.
For example, a more appropriate multiple, at a minimum would be 15 times implied profits. So 15 times $1.4 billion works out to a market cap of $21 billion. That works out to a 43.8% increase over Opendoor’s present market of $14.608 billion.
Therefore, we can say that at a minimum, OPEN stock should be 43.8% higher at $34.65 per share.
Where This Leaves OPEN Stock
Other analysts tend to agree with me. For example, Yahoo! Finance, which uses Refinitiv analyst survey data, reports that 6 Wall Street analysts have an average price target of $32.67 per share. This is almost identical to my price target of $34.65.
Moreover, Seeking Alpha indicates that 7 analysts have an average price target of $32.67 per share, the same as Yahoo! Finance.
However, TipRanks reports that 4 analysts have written about OPEN stock in the last 3 months and have an average price target of $35.00. That is also close to my $34.65 target and represents a potential gain of 44.87% from today’s price.
This means that the sell-side is very positive about Opendoor Technologies stock going forward. Even if it takes 2 years for the stock to reach $34.65 or 43.8% higher, this implies that the average annual return will be 19.9% annually on a compounded basis. For most investors, that is a pretty good ROI.
The risk is that prices stay flat over that period. This could put a dent in the company’s returns and drive up its costs, especially its financing costs. However, even at 15 times expected home sales profits, the stock seems to reflect the downside risks. That is because this is a very conservative multiple. With higher home profits the multiple will likely be over 20 times.
Most value investors will therefore begin acquiring a small portion of OPEN stock shares. This is despite the fact that it has been consistently rising. It’s likely to move much higher.
On the date of publication, Mark R. Hake did not hold (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.