Opendoor Technologies (NASDAQ: OPEN) is recognized as an iBuying pioneer, making instant cash offers for homeowners to seamlessly navigate the real estate selling process.
Unfortunately, the company has not yet been able to translate the significant potential of this transaction model into a successful business. The stock is down a catastrophic 95% from its pandemic-era peak amid recurring losses and prolonged housing market weakness.
Still, the possibility that Opendoor finally gets its online platform system right and an improving market outlook could make shares a winner. Despite plenty of uncertainties in the outlook, the company's latest results highlighted some encouraging trends.
If you're invested in or plan on buying Opendoor Technologies stock, you may want to consider the following.
A mixed second-quarter earnings report
The main challenge facing Opendoor Technologies is the low level of housing market activity. Industry data shows that new listings are near a decade-low and the number of existing home sales is well under the pre-pandemic average. A combination of high mortgage rates and still elevated prices have been difficult for both real estate buyers and sellers with Opendoor caught in the middle.
In the second quarter, the company sold 4,078 homes generating $1.5 billion in revenue, down 24% year over year. While that headline is concerning, some context is important.
Opendoor has made progress in adjusting its unit economics, which is evident by a 6.3% contribution margin this quarter, reversing a 4.6% loss in the period last year. This metric captures the direct profitability attributed to the actual real estate transaction beyond other corporate expenses like marketing.
In this case, Opendoor generated a $23,000 contribution profit per home sold this quarter, compared to the $17,000 loss in Q2 2023. The result helped narrow the company's adjusted earnings before interest, taxes, depreciation, and amortization ( EBITDA ) loss to $5 million, compared to a loss of $168 million in the prior year quarter. Again, not great, but at least there are some signs that Opendoor is moving in the right direction.
The company plans to increase acquisitions as the housing market normalizes. Notably, Opendoor ended the quarter with an inventory of 6,399 homes, nearly double the level last year, which management believes can contribute positively to its spreads.
Image source: Getty Images.
Housing market uncertainties
Opendoor Technologies could emerge as a turnaround story, but it's likely too early to make that call. The company will need many factors on the macro side and for its financial results to align just right before investors can build confidence in its path to sustainably profitable growth.
Favorably, there is some optimism that the Federal Reserve could be close to cutting interest rates, which would provide some relief to housing by bringing buyers back to the market. On the other hand, what's less clear is how home prices will evolve if lower interest rates add to supply as sellers also take the opportunity to reenter the market.
The best-case scenario for Opendoor Technologies is one where it sees an increasing level of existing home sales nationally and climbing or at least steady average sales prices as a sign of healthier market conditions. The ability to both expand and generate a higher contribution profit per home sold should be positive for the stock long-term.
A situation where the housing market deteriorates further, either from lower activity or a correction in prices, would represent a headwind for the company and undermine its outlook.
Decision time for Opendoor stock
Ultimately, Opendoor Technologies remains a high-risk and speculative investment. The stock's valuation, trading at just 0.25 times its revenue during the past year, is justified in my opinion given that its lack of profitability is likely to continue for the foreseeable future. The market appears skeptical of the long-term potential of Opendoor's strategy potential.
I believe there's a middle ground. Considering that the shares have fallen more than 60% this year, I believe a hold rating for current investors can make sense because it's too late the sell, and many of the company's weaknesses already are priced into the shares. For investors thinking about picking up the stock now, a wait-and-see approach may also be prudent.
Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Opendoor Technologies. The Motley Fool has a disclosure policy .
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