Opendoor Still Makes Sense Despite Broader Warning Signals

There is currently a lot of volatility surrounding Opendoor Technologies (NASDAQ:OPEN) stock. The company soared nearly 20% higher on positive news contained in its Q3 earnings report.

The Opendoor (OPEN) website is open on a smartphone that is resting on top of a map.
Source: Tada Images / Shutterstock.com

The company also expects that growth should continue into the next quarter. That has investors wondering if now is the time to get on board with the homes iBuyer as the platform is showing several positive signs. 

Yet, Zillow (NASDAQ:Z) announced it would discontinue Zillow Offers, its iBuying program only a week earlier. That news had held Opendoor share prices lower while raising questions about the operational model at large. In short, there is currently little clarity regarding OPEN stock. 

Let’s begin by looking at the positives and then jump into the real risks which surround Opendoor moving forward.

A Strong Third Quarter 

Opendoor had a strong third quarter. Not only did it show massive growth, but it also exceeded consensus expectations. 

Q3 year-over-year growth at Opendoor was significant. The company recorded $338.6 million in revenue in Q3 2020. That increased to $2.266 billion in the third quarter of this year. That’s impressive, but not entirely unexpected given how young the firm is. 

Investors were looking for Opendoor’s performance relative to previous guidance. There the company shined.

Opendoor outpaced consensus expectations by reporting a loss of 9 cents per share when analysts were ready for an EPS loss of 17 cents. The firm was only expected to record $2 billion in revenues, but ended up recording $2.266 billion in the quarter. 

Revenues in the third quarter were 6.7x higher than a year ago. That is difficult to gauge because of the youth of the company. However, the good news is that revenues were 91% higher than those in Q2. 

And Opendoor provided bullish news in the $3.1 to $3.2 billion of guidance it gave for revenues in Q4. 

Should that guidance prove correct the company will record sequential growth between 36.8% and 41.2%. All of those positives are responsible for OPEN stock’s 18% price jump at earnings. 

But investors have to understand that real risks abound. 

Zillow News

It was only a week earlier that Zillow sent a strong signal to the markets regarding iBuyers. The company announced that it was discontinuing its iBuying program, Zillow Offers. 

As reported by Barron’s, Zillow had good reason to exit when it did: “Zillow’s home-buying business lost $381 million in the third quarter, according to the company’s adjusted earnings before interest, taxes, depreciation, and amortization, or Ebitda. Zillow took a $304 million write-down on homes it says it bought at higher prices than what it expects to sell them for.”

While Opendoor’s Q4 guidance suggests it remains adamant about the near future of iBuying, the Zillow news nevertheless rippled through the sector. That had caused Opendoor prices to sink until the Q3 earnings momentarily erased fears. 

Redfin (NASDAQ:RDFN) remains committed to its iBuying program, but its CEO had strongly worded comments. Redfin CEO Glenn Kelman notes that “If you have to buy houses every day of the week, in every type of market condition, you are just force-feeding yourself potentially toxic assets.”

That raises a good question about the Opendoor model. Where is its risk, and how exposed is it to those potentially toxic assets? The answer can be found in the recent earnings report. “The Company typically sells mortgages on the secondary market within a relatively short period of time after which the Company’s exposure is limited to borrower defaults within the initial few months of the mortgage.” 

What to Do With OPEN Stock

Opendoor is clearly improving its business. Other larger real estate companies like Zillow and Redfin are more cautious about iBuying. Zillow is simply out.

That said, iBuying isn’t going to die. And if a mortgage collapse or anything else occurs the Zillows and the Redfins of the world will suffer as much as Opendoor. 

That’s why I’d suggest that if you believe real estate will continue to appreciate, then OPEN stock still makes sense despite recent volatility.

On the date of publication, Alex Sirois 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.


Article printed from InvestorPlace Media, https://investorplace.com/2021/11/open-stock-still-makes-sense-despite-broader-warning-signals/.

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