Following its most recent selloff, Opendoor Technologies (NASDAQ:OPEN) has fallen down to around $10 per share. To some, this may seem like a great entry point for OPEN stock.
For one, that’s less than a third of what it traded for a year ago, when excitement for it was at its peak. $10 per share was also this former special purpose acquisition company’s (SPAC) debut price, when it went public back in 2020.
But don’t let its much lower price fool you. At today’s valuation, it remains far from being any sort of value play. Its $6.6 billion market capitalization remains built entirely on perceived future growth potential, not on its current operating performance.
Along with this, there’s the risk of possible challenges ahead for the housing market. A cooldown in housing is bad news for the company, given its high dependency on surging prices for residential real estate. If it takes another big dive, say down to prices on par with some of Chamath Palihapitiya’s other busted SPACs, it may be worth a second look. For now, though, it’s best to hold off.
OPEN Stock at a Glance
Opendoor is one of America’s leading iBuyers. What’s an iBuyer? It’s basically a digital house flipper. Purchasing residential properties from homeowners using algorithms for pricing, iBuyers fix them up, quickly re-selling them to eke out a small profit.
Such a capital intensive, low-margin business model may not sound like something the growth crowd would go bananas about. But last year, when SPAC stocks were in the range, especially ones owning businesses with “disruptive” business models, OPEN stock made a “to the moon” move, again to prices north of $30 per share.
Since then, however, sentiment for this “future of real estate” play has changed considerably. That’s not only because speculative hype for blank-check companies has long since passed. With Zillow (NASDAQ:Z, NASDAQ:ZG) throwing in the towel with its iBuying business, writing off high losses in the process, the market has become increasingly concerned about the iBuyer business model.
Along with this, with rates rising, growth stock valuations have dropped in line with a higher discount rate. Speaking of interest rates, this factor could do more damage to shares beyond simply driving more multiple compression.
Why This iBuyer Could Soon Find Itself in a Bind
Much like a homeowner who owes more on a house than it’s worth, many holding OPEN stock are underwater on their investment. Paying $20, $30, or even more per share, they’re sitting on big losses, regretful about buying into this name near the top.
If you’re in this position, you of course have two options. One: Cash out, accept the loss and move on. Two: Ride things out in the hopes that as the “story” behind Opendoor continues to play out, it’s on course to make a return to its high-water mark. Alas, assessing the situation, it’s looking more going with option one is better than going with option two.
It may be expanding to more U.S. housing markets, including its own backyard. But given where the housing market may be headed, the company may be expanding at the worst possible time. Yes, so far, the prospect of rising interest rates doesn’t seem to have dampened housing demand. Search for “housing crash,” and you’ll get bullish headlines, including one referencing analysis from Zillow saying that home price growth is set to accelerate this spring (due to supply shortages).
On the other hand, these types of headlines could prove in hindsight to be little more than clickbait and industry hype. As economist Gary Shilling argued in a recent Bloomberg op-ed, builders are ramping up supply. Demand is waning, which could slack further as rates rise. This could put pressure on housing prices, leaving Opendoor in a bind.
Wait for a “Buyer’s Market” Before Buying OPEN Stock
With the high risk of a housing market cooldown, it makes sense why BofA analyst Curtis Nagle has turned bearish on Opendoor shares. Downgrading the stock to the equivalent to “underperform” with an $8 per share price target, Nagle is concerned that this iBuyer has bought too many houses, largely through debt financing.
Furthermore, the sell-side analyst argued that the iBuyer business hasn’t been tested in a bear market for housing. Already expected to report losses this year, it could find itself deeper in the red for 2022 if more bearish takes on where the housing market’s headed ends up proving true.
If a housing market cooldown pushes it to rock-bottom prices, give OPEN stock a second look. Until then, it’s best to avoid.
On the date of publication, Thomas Niel 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.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.