• Opendoor Technologies is up 25% in the past week
• It appears investors are buying its growth story
• OPEN stock is a momentum play worth considering

Opendoor Technologies (NASDAQ:OPEN) looked dead to rights after delivering mixed Q4 2021 results on Feb. 25. OPEN stock fell by 30% on the news. Then, it lost some more, hitting a 52-week low of $6.16 on March 8. 

However, since hitting the low $6s, the house buying and selling platform’s gone on a wild ride higher.

As I write this, OPEN is trading at around $9.

If you’re an aggressive investor and ignore its lack of profits, OPEN appears to be a momentum play worth considering. However, I wouldn’t buy it. I wrote as much in my article about Opendoor back in February, but that was before it released its fourth-quarter results.

I still believe Zillow (NASDAQ:Z) is the better long-term buy. That said, Opendoor is sitting on a pretty good opportunity if it can execute its game plan. 

Here’s why.      

OPEN

Opendoor Technologies

$9.03

OPEN Stock Is the Best Option

In my February piece, I suggested that Offerpad Solutions (NYSE:OPAD) could be a better buy than Opendoor if you’re into the iBuying business. That’s because it was doing a superior job of buying and selling homes than Opendoor. In addition, it looked to be a more financially sound business.  

However, the one thing it doesn’t have is Opendoor’s scale.

In 2021, the company had $8 billion in revenue from the sale of 21,725 homes. By comparison, Offerpad generated $2.1 billion from selling 6,373 homes in the past fiscal year.

There is no question that Opendoor is building the scale necessary to profitably buy, renovate and sell homes over the long haul. In some ways, iBuying is the real estate version of the grocery store. Just keep turning the houses until the thin margins pay for themselves. 

So, Opendoor’s revenues were 4x those of Offerpad in  2021.  

Eric Wu, Co-founder and CEO of Opendoor said the company was well ahead of its financial projections and grew revenue by more than 200% between 2020 and 2021.

Opendoor is now in 44 markets. So if you want to sell your home fast and live in one of those markets, they’re the ones you will use. It’s that simple.  

Once it becomes profitable, the sky’s the limit for OPEN stock. 

How Long to Profitability

Now that I’ve looked at its Q4 2021 results, its pathway to profitability might not be nearly as far away as I’d initially thought. 

In 2021, Opendoor lost $116 million on an adjusted basis, 34% less than in 2020. Its contribution margin — defined as contribution profit divided by revenue — increased by 220 basis points in 2021. Including interest, its contribution margin increased 280 basis points to 6.0%. 

Two things have to happen to get to GAAP profitability.  First, it has to get its gross profit margin to double digits. It finished 2021 with a gross margin of 9.1%, 60 basis points higher than 2020, and 270 basis points higher than 2019. Its contribution margin was tantalizingly close at 9.6% on an adjusted basis.

Second, it has to hold the line on operating expenses — $1.3 billion in 2021 or 16.3% of revenue — and boost its gross profit margin to 12% in 2022; it would need approximately $10.82 billion in revenue [$1.3 billion divided by 12%] to break even.  

Considering its revenue increased 211% in 2021, it would take a significant slowdown in its growth to miss $10.82 billion in 2022.

I’m not saying it will get to a 12% gross margin in 2022, but if it does, it’s got a very good shot at making money. 

The Year Ahead

The biggest risk Opendoor faces in 2022 is a nationwide recession. With interest rates moving higher and inflation continuing to hurt Americans’ standard of living, a recession would dramatically slow the housing market, reducing the amount of money it can make from each house it buys, renovates, and resells. 

Although a recession is unlikely, were it to occur, Opendoor’s pathway to profitability would most certainly take longer. So, naturally, that would hurt Opendoor’s share price. 

In early March, InvestorPlace’s Luke Lango discussed the irrational selloff that happened after Opendoor reported Q4 2021 earnings. He unequivocally stated that buying on the dip could produce a 20x return on your money over the next few years. 

Assuming you were one of the lucky ones to buy Opendoor below $7 after earnings, my colleague’s suggesting $140 isn’t out of the realm of possibility by 2030. That would give it a market cap of $102.4 billion. 

My only concern with Lango’s estimate is the 300,000 homes sold by Opendoor in 2030. That’s a compound annual growth rate of 33.9% over the next nine years. Based on 2021’s growth rate of 119%, it’s doable, but who knows what will happen in 2023 and beyond.

If you’re an aggressive investor, buying under $10 doesn’t seem bad given Opendoor stock’s momentum. 

On the date of publication, Will Ashworth 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.