Is Time Running Out for This Property-Tech Stock?

Is Time Operating Out for This Property-Tech Inventory?

The housing market’s sharp reversal in 2022 caught actual property expertise firm Opendoor Applied sciences (OPEN 7.22%) abruptly. And so it has been aggressively clearing stock purchased at greater costs, piling up losses.

Fourth-quarter earnings gave buyers some perception into Opendoor’s progress. Listed here are the important takeaways from the quarter, which might let you know whether or not the corporate’s financials can survive or if extra bother lies forward.

A yr to overlook in 2022

What a distinction a yr could make: Housing costs have been crimson sizzling in early 2022, resulting in tales of bidding wars and residential excursions with strains of individuals out the door.

Opendoor, which buys properties with money presents and resells them for a charge, bought a whopping 14,135 properties within the second quarter of 2022. However quickly rising rates of interest precipitated mortgage charges to surge to ranges not seen in 20 years, making housing a lot much less reasonably priced and cooling demand.

30-year mortgage charge, knowledge by YCharts.

Opendoor has been frantically making an attempt to off-load these properties over the previous two quarters, shedding some huge cash within the course of. Its money and marketable securities fell from $2.5 billion to only $1.3 billion over the previous two quarters. Administration famous that 66% of properties purchased throughout the second quarter have been offered or underneath contract at year-end, which ought to improve to 85% by the top of the primary quarter of 2023.

The continued efforts to unload these second-quarter properties have Opendoor anticipating losses of $350 million to $370 million within the first quarter, primarily based on earnings earlier than curiosity, taxes, depreciation, and amortization (EBITDA).

In different phrases, the errors made within the second quarter have value Opendoor a whole lot of tens of millions of {dollars} and brought a yr to proper the ship. Co-founder Eric Wu resigned as CEO, which can or might not coincide with this robust stretch.

Opendoor’s enterprise mannequin takes a ton of capital to function (every transaction is price a whole lot of 1000’s of {dollars}), and the previous yr reveals how small the margin for error might be.

Can Opendoor get again on observe in time?

New CEO Carrie Wheeler, the corporate’s former chief monetary officer, has outlined a plan to stroll again progress to give attention to profitability. Particularly, Opendoor is focusing on constructive adjusted earnings by mid-2024 on $10 billion in annualized income.

The corporate has completed $15 billion in income over the previous 4 quarters, so the enterprise is shrinking to rein in prices.

The give attention to income is an encouraging signal that the corporate realized from its aggressive enlargement and ensuing errors. Opendoor has little iBuying competitors after partnering with Zillow and seeing Redfin abandon the follow altogether. The corporate would not must chase market share at reckless velocity.

OPEN Chart

OPEN knowledge by YCharts.

However there’s a working clock on Opendoor’s financials, which is the actual menace that shareholders should watch intently. The corporate’s money is starting to run skinny. It would not have sufficient to repeat 2022 losses, so issues should enhance rapidly, and administration has already painted a grim image for the primary quarter of 2023. 

Opendoor would possibly want additional cash, however an fairness increase at these low share costs might be a catastrophe. A $1 billion increase would roughly double the share depend, a painfully dilutive consequence for shareholders who’re principally sitting on losses already.

Is Opendoor a purchase right this moment?

Wall Road is not giving Opendoor a lot advantage of the doubt proper now. The inventory is buying and selling at guide worth, which is the worth of any stability sheet property after subtracting liabilities. So the market has set very low expectations for the corporate. And there’s a purpose for that.

OPEN Book Value (Quarterly) Chart

OPEN guide worth (quarterly) knowledge by YCharts.

Opendoor plans to show round its financials, however a number of the firm’s destiny now falls outdoors its management. It should understand higher margins on properties purchased after the second quarter of final yr, one thing that requires the housing market’s stability. A recession or frequently rising mortgage charges might make it onerous for it to maintain its head above water, no matter what administration does.

The corporate is way more financially weak than a yr in the past, which makes the inventory way more speculative than it as soon as was. Traders can deal with shares like a lottery ticket, given the common-or-garden valuation it trades at right this moment. Contemplate Opendoor a high-risk, high-reward play on long-term innovation in actual property.

Justin Pope has positions in Opendoor Applied sciences. The Motley Idiot has positions in and recommends Opendoor Applied sciences, Redfin, and Zillow Group. The Motley Idiot recommends the next choices: quick Could 2023 $16 calls on Redfin. The Motley Idiot has a disclosure coverage.

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