Opendoor Technologies ( OPEN -3.87%) was once considered doomed, but later gained popularity as a meme stock. The real estate platform has surged over 500% this year and has increased twentyfold since its June lows, recently climbing above $10 per share. Following the replacement of its previous CEO, the appointment of a seasoned executive, the return of its founders to the board, and the launch of a turnaround plan, Opendoor has captured the enthusiasm of investors.
But is it a wise investment? Let’s analyze Opendoor’s financial prospects and consider where its shares might be trading in five years.
A rapidly evolving turnaround
Opendoor, which operates an online platform for buying and selling homes, has consistently struggled to achieve profitability. Its narrow margins and capital-heavy model, which requires holding unsold homes as inventory, have made growth difficult, especially during the slowdown in the housing market. As a result, the company’s stock dropped below $1 per share earlier this year.
When shares collapsed, activist investors intervened, pushing for leadership changes. Soon after, meme stock enthusiasts joined in, sending Opendoor’s value soaring twenty times over in a matter of months. The company has since named Kaz Nejatian, former chief operating officer at Shopify, as its new CEO. This week, Nejatian received a compensation package rewarding him with substantial bonuses if Opendoor’s share price reaches as high as $33.
Additionally, co-founders Keith Rabois and Eric Wu have joined the board of directors. These new leaders are already outlining aggressive changes for the company. Rabois has remarked that Opendoor is burdened by excessive costs and could operate with just 200 employees, compared to the current workforce of 1,400.
Image source: Getty Images.
Is the business model viable?
Opendoor needs significant cost reductions since it has yet to turn a profit. Over the past year, the company reported a net loss of $305 million. Cutting expenses could help Opendoor stop the financial losses and possibly reach break-even.
For long-term success, Opendoor must broaden its business beyond simply flipping houses. Past results indicate this strategy lacks profitability, with last quarter’s gross margin at only 8.2%. To address this, the company is expanding its technology offerings, collaborating with real estate agents via its Key Agent app to boost transactions and commissions. Opendoor has also introduced a Cash Plus model, allowing sellers to receive upfront payments and additional bonuses if the home later sells at a gain.
With the new leadership just settling in, more innovative products are likely in development. While specifics remain unclear, hints suggest these offerings will leverage artificial intelligence (AI) to enhance the home buying and selling experience.
OPEN Net Income (TTM) data by YCharts.
Opendoor’s outlook in five years
There’s a great deal of excitement about Opendoor’s future. However, at the moment, this is just speculation. The stock is currently priced as if the company has already revolutionized the housing market, yet it continues to operate with slim margins and ongoing losses. At its present price of $10 per share, Opendoor’s market value stands at $7.5 billion—roughly half that of Zillow Group, the leading digital real estate company.
Without any profits, it’s not possible to value Opendoor by its price-to-earnings (P/E) ratio. Instead, consider its gross profit of $417 million, which puts its valuation at nearly 20 times gross profit (not accounting for future dilution). That’s a steep premium. While cost-cutting and new initiatives from the recently installed management could eventually bring positive cash flow,
the market has already factored in much of this anticipated success into today’s share price. Over the next five years, Opendoor’s stock could remain stagnant or even decline from current levels. For now, it’s best to steer clear of this popular meme stock.
