Opendoor Technologies (OPEN) operates a digital platform for residential real estate in the United States. Its platform enables consumers to buy and sell a home online. The company was founded in 2014 and is based in Tempe, Arizona.
I am bearish on the OPEN stock as the company is unprofitable, and there is an important cash runway risk now.
Opendoor Technologies Business News
In late December 2021, Opendoor posted an article full of insights about key trends and milestones achieved during the year.
The company reported that it infused more than $500 million in local economies, expanded to 44 metro markets across the U.S., had more than 100,000 transactions since its launch, more than 93,000 home assessments, and 520,000 homes were visited by buyers. Also, 3.5 offers were sent per minute, and amid the pandemic, virtual home tours doubled from 2020 to 2021.
These are indeed remarkable figures for the digital real estate platform. Other important demographic information posted was that the ideal home was in the range of $200,000-$600,000, and the ideal home size has three bedrooms and two bathrooms. Interestingly, the main reason people asked for an offer from Opendoor was for either retiring or downsizing, less for upgrading, and even less for relocating.
Q3 2021 Financials: A Beat on EPS and Revenue, Cash Burn is Very Significant
Third-quarter 2021 financial results were a beat on EPS and revenue. OPEN stock earnings have improved over the past two quarters but remain negative as the company was unprofitable in 2020.
EPS GAAP of -$0.09 was a beat by $0.08, and revenue of $2.27 billion was a beat by $253.2 million.
Revenue increased 91% versus Q2 2021, gross profit of $202 million was higher than $159 million in 2Q21, and the net loss of -$57 million was lower than -$144 million in 2Q21.
Fundamentals – Risks
One of the key risks for Opendoor is that in Q3 2021, it purchased 15,181 homes, up 79% versus Q2 2021, and the inventory balance grew to 17,164 homes, representing $6.3 billion in value, up 130% versus Q2 2021.
Why do I see it as a risk? First, the U.S. real estate market remains resilient and strong, but building an inventory is generally not a good practice in any business unless, of course, you expect higher future demand to sell the inventory at higher prices. Interest rates are expected to rise in 2022, inflation remains high, and mortgage rates most likely will increase.
Elevated home prices in an elevated stock market that have started a rocky new year combined with stocks that have been under selling pressure can simply mean lower disposable income for consumers. Lower income will be bad news for prospective new homeowners.
There could be a shift to refinancing another type of loan at a fixed rate before interest rate hikes occur. Therefore, people/businesses could put the need to buy a new home on hold. In that scenario, Opendoor will be left with a large inventory of homes that may decline in value as their prices are driven by supply and demand.
There are other red flags for OPEN stock now to consider. It has an Altman Z-score of 1.33, placing it in the distress zone, increasing the bankruptcy possibility in the next two years.
In Fiscal 2020, the firm reported free cash flow of $664.5 million and a net loss of -$286.76 million.
In the first nine months of 2021, the cumulative net loss was -$471.07 million, and the cumulative free cash flow was -$5.9 billion. In Q3 2021, the free cash flow was -$3.6 billion. In its recent Q3 report ended September 30, 2021, Opendoor reported cash & short-term investments of $1.84 billion. This means Opendoor has less than a year of cash runway based on its current free cash flow.
Shareholders have been diluted in the past year, with total shares outstanding growing by 12.5%. This by itself makes the stock to be less appealing, being relatively overvalued based on its P/B ratio of 2.9x compared to the U.S. real estate industry average of 1.7x.
Wall Street’s Take
Turning to Wall Street, Opendoor Technologies has a Moderate Buy consensus based on four Buys and two Hold ratings. The average Opendoor Technologies price target of $26.80 represents 111.5% upside potential.
Conclusion
Opendoor Technologies is unprofitable, is burning too fast cash, and may soon face a severe cash runway problem. Rising interest rates in 2022 are another risk as the company has increased its home inventory betting on a strong real estate market continuation.
Download the TipRanks mobile app now
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Read full Disclaimer & Disclosure
