Opendoor has big news, and so does the Federal Reserve.
It’s been a wild ride for Opendoor Technologies (OPEN -5.58%) over the past few months, culminating in a new CEO, announced last week.
It was a stunning development in Opendoor’s ongoing saga, started when retail investors banded together to create another GameStop-like stock rally, pushing the price to the sky and involving activist investors to the point of ousting CEO Carrie Wheeler. Let’s see what the new CEO brings to the table and why Opendoor’s stock is already up even more this week.
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Turnaround or value trap?
Opendoor stock has been in trouble for a while, and it touched a low of $0.51 in July. That set off a frenzy of buying activity in a social media-driven campaign, and Opendoor stock is up a breathtaking 1,750% since that time.
It’s a curious tactic, since Opendoor has been having a miserable time in a high-interest rate climate. But retail and activist investors sense that a turnaround is likely, and this was a way to win big on a potential turnaround.
Even at the current price, Opendoor stock is still 74% off its all-time highs. Those highs happened when interest rates were near zero, investors were basking in a strong bull market, and it looked like Opendoor’s model was going to be the next big thing in real estate. At that time, it was demonstrating robust growth, and it wasn’t even expensive, making it look like a no-brainer stock to own. At the current price, it trades at a price-to-sales ratio of 1.3, which still looks cheap. But considering the state it’s in, investors should be wary of a value trap.
New CEO, high prospects
How Opendoor progresses over the next few years all depends on how the real estate market progresses. Although the market was pleased with the announcement of the new CEO, it’s still just potential.
Kaz Nejatian comes to Opendoor from Shopify, where he was COO since 2019. His area of expertise is product management, and returning board member Keith Rabois, who was an original co-founder of Opendoor, praised him as a “decisive leader” who is excellent at managing costs to drive profitability and who understands how artificial intelligence (AI) can transform the company. In addition to Rabois, who is becoming chairman, the company is also bringing back Opendoor co-founder Eric Wu as a board member.
The news coincides with the Federal Reserve’s September meeting happening this week. Chairman Jerome Powell has indicated that he would cut interest rates, which could finally move the deadlocked housing market.
Even though interest rates have already been cut from highs, mortgage rates and the housing market have barely responded. In the most recent data, for the month of July, new U.S. homes moved up slightly from last month but were down year over year, while sales of existing homes fell from last month but were flat year over year, according to U.S. Department of Housing and Urban Development. The rate of U.S. home ownership fell for the second straight quarter, and the 30-year fixed mortgage rate was down a drop but remained above 6.7%.
Up for the challenge
Whatever happens in the market, shareholders will expect Nejatian to make some moves to improve the company’s sluggish performance. Whether it’s cutting costs or finding innovative ways to boost sales, he has a difficult task ahead of him.
There were some improvements in Opendoor’s second-quarter results. Revenue was up 4% over last year, and homes sold were up 5%. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was positive $23 million, up from a $5 million loss last year.
However, there’s a lot more to go. It’s well off peak highs for revenue and gross profit, and its inventory balance is 32% below what it was last year.
Opendoor stock rallied 37% last week, and it’s gaining more this week in anticipation of a rate cut. Risk takers might find Opendoor interesting right now. Most of its ibuying competition has bowed out of this space, which requires tons of capital and is highly susceptible to interest rate trends. That leaves it a healthy opportunity to disrupt the status quo in real estate, which could definitely use a makeover. At under $10 a share, you could invest $100 and see what happens, so long as you can afford to lose that money.
However, Opendoor is a risky play today, and most investors should sit on the sidelines while it finds its footing.