- North Carolina regulators disciplined Opendoor (OPEN) for faulty disclosures.
- Investors ought to be concerned that, as it scales its iBuying business, more mistakes crawl out of the woodwork.
- If you’re an aggressive investor, the latest news could get you a much better price for OPEN stock.
The North Carolina Real Estate Commission recently released its April 2022 eBulletin for disciplinary actions taken against real estate professionals in the state. Listed amongst the various names of brokers in the state was Opendoor Brokerage LLC, the brokerage arm of Opendoor Technologies (NASDAQ:OPEN). That did NOT help OPEN stock.
In three different transactions, the Charlotte-based brokerage failed to disclose information relevant to the sale of these homes. According to a report, Opendoor said “this is the first disciplinary action they’ve received in the state, and they avoided an 18-month suspension with additional education offered by the commission.”
So, as Opendoor continues to scale its business, one must wonder if the increased buying and selling of homes won’t result in future suspensions by other state regulatory bodies.
In turn, that can’t be good news for the price of OPEN stock. However, if you’re bullish about the company’s future, this slap on the wrist gets you a much better price to buy some more. How? Let’s dive in and explore this thesis a bit more.
Opendoor Does a Lot of Transactions
In 2021, Opendoor sold 21,725 homes, up from 9,913 in 2020 and 18,799 in 2019. In terms of revenue, it generated $8.02 billion last year, up from $2.58 billion in 2020 and $4.74 billion in 2019. Additionally, Opendoor said it helped customers carry out more than 140,000 transactions for both buyers and sellers.
With that in mind, three indiscretions out of 140,000 is hardly an infestation. That said, as the company continues on its pathway to profitability — it lost $116 million on an adjusted basis in 2021, down from $175 million a year earlier — the opportunity for this kind of thing to happen more often gets ratcheted up.
So, if you’re thinking of buying OPEN on the dip, remember that every time one of these regulatory bulletins gets released, and Opendoor is listed amongst those receiving disciplinary action, the stock will take a hit. Every time.
However, as InvestorPlace’s Luke Lango recently pointed out, that’s the cost of doing business. So the more homes Opendoor sells, combined with a higher profit per home sold, ultimately will deliver the company to profitability.
Furthermore, Lango points out that the company is currently listing homes for sale that it bought 70 days earlier for 17% more than what it paid. So, for example, Opendoor buys a house for $300,000. Then it puts $10,000 in renovations into it before listing it 70 days later at an average of $351,000. That’s a profit of $41,000 — $300,000 times 17% less $10,000 in renovations — in approximately 10 weeks or 2.5 months.
Not a bad gig.
OPEN Stock and a Recession
As I said in my last article about Opendoor, the biggest risk right now is that America goes into a recession. I know it seems unlikely, given the unemployment rate of 3.6% is a tad above the 50-year low of 3.5% in March 2020.
Additionally, the country’s added at least 400,000 jobs each month for the past 11. It could break the record by sometime this summer. At the same time, wage increases have also been healthy. So, one would think a recession isn’t in the cards.
Moody’s Analytics Chief Economist Mark Zandi recently told CNN Business that there’s a 33% chance of a recession in the next 12 months. The combination of the Russian invasion of Ukraine, inflation and higher interest rates could be the perfect storm to throttle the economy.
“It’s reasonable to be nervous here,” Zandi said. “The Russian invasion and the spike in oil and commodity prices changed things.”
And we all know what happens when the economy goes into the tank: Real estate follows it down.
Thus, for Opendoor to be successful, it needs real estate prices to cooperate while it scales its business. If real estate prices fall along with a slowdown in buying and selling homes, revenues get hit, and its pathway to profitability moves that much further out.
Aggressive Investors Should Still Buy
Recently, my colleague mentioned University of Colorado scholar-in-residence Mike Delprete. The man pocketed a chunk of money selling Agora Games in 2009 and eventually became a real estate tech strategist. Now, he spends his days talking about real estate technology.
On that note, his March 22 post suggests Opendoor will have a blockbuster second quarter generating a contribution margin above its 2021 highs of around 10%. If it does this, it could be profitable in 2022.
In turn, I would suggest that buying now instead of waiting to find out if he’s right will cost you a significant amount of money. I would also recommend that you have a plan for holding OPEN stock beyond the second quarter. As Delprete says, if real estate prices get shot to hell, likely, Opendoor’s share price does too.
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.
Will Ashworth has written about investments full-time since 2008. Publications, where he’s appeared, include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.