Many moguls have made their millions (or billions) in real estate, but as much as the industry can create fabulous wealth, it can also go through severe downturns. It's a cyclical business and with today's high interest rates, real estate stocks have plummeted.
Opendoor Technologies (OPEN -4.97%), a real estate technology company that intends to disrupt the status quo, is down in the dumps right now. Its stock has fallen 94% from the all-time high recorded in early 2021. Is a rebound coming?
No relief in the short term
Opendoor's business doesn't look so pretty these days, and it hasn't for a while. With higher interest rates, homeowners are reluctant to part with their property and buy a new one at a high interest rate. That means fewer homebuyers and fewer homes on the market.
The first quarter is one snapshot, but it's representative of the ongoing woes at Opendoor. Revenue dropped 62% year over year in the quarter, and its net loss totaled $109 million. It had an inventory of 5,706 homes, down 11% year over year.
There were some wins in the quarter, or at least signs of progress. Gross margin was 9.7%, up from 5.4% a year ago. The company also purchased 3,458 new homes, almost doubling its volume.
Management highlighted the year-over-year improvement to its contribution profit and margin in the first quarter, which climbed from a $251 million loss and negative 7.7%, respectively, to a $57 million profit and 4.8%. These metrics give a glimpse into the per-unit profitability of Opendoor's core homebuying and reselling operation, which tells investors there is a viable business model here.
However, Opendoor is a young company, and it doesn't have a long track record of exceptional performance to reassure investors who are worried it cannot navigate market downturns. But there is a compelling long-term investing thesis here.
Lots of opportunity in the long term
Opendoor is the real estate platform of the future. It uses artificial intelligence (AI) to make use of years of data, including 10 million home offers, to create accurate price quotes. It offers other services through its platform, including seller listings and an online marketplace.
Like other tech-based disruptors, Opendoor has a digital infrastructure that could give it a huge edge over legacy real estate companies. Only 1% of the real estate industry is online, but that's changing. Opendoor touts its automation, quick cash offers, and end-to-end process as benefits for users.
Management is leveraging the information it's getting in the current high interest-rate climate to improve its platform and prepare for all kinds of market conditions. It changed its cost structure to get through the current environment, and it's reduced operating expenses to meet changing demand. When the tide turns back in the industry's favor, Opendoor should be in a stronger position than it was previously.
Is now the time to buy?
With net losses and negative free cash flow, Opendoor stock trades at a price-to-sales ratio of 0.3, which gives you a good idea about market sentiment right now.
The Federal Reserve has indicated it might lower rates over the next few months, but there's no guarantee. Until that happens, Opendoor's business isn't likely to rebound, although it may begin to demonstrate year-over-year improvements from the dismal performance it's reported in recent quarters.
But even once interest rates go down, it will take time for Opendoor to reinvigorate its business. Between the volatility and poor operating environment, I'd skip this stock for now, despite the bargain price.
