The stock market is gaining momentum again after taking a dip for about a month. Spending is holding up despite inflation and rising interest rates, and while many retailers are feeling the pinch of macroeconomic issues, other companies are keeping up a strong performance.
Housing is one industry that’s been seriously impacted by rising interest rates, since fewer people can afford mortgages when rates are sky-high. After factoring in long-term payments, prices for the same house could end up being double what they were when rates were low.
There have been several new digital-housing platforms that generated investor excitement when the housing market was strong, but they’ve been having a tough time in this climate. Opendoor Technologies (OPEN -0.26%) made waves as an ibuyer, what was supposed to the be new and improved alternative to typical real estate transactions. But sales have plunged along with the housing market. Despite the poor performance, Opendoor’s stock has rebounded and is up 236% year to date. Let’s see why and whether or not there’s more to go.
Many tech-based disruptors are successful because they provide improved, easier, and often cheaper solutions for their customers. They often remove the pain points that make certain transactions laborious and dread-inducing.
Opendoor operates an ibuying platform where it buys thousands of homes and resells them at a higher price. It’s a fairly simple model that appeals to sellers because it’s quick and easy. It also appeals to home buyers because it’s easy to search and find what they’re looking for, its fees are often lower than typical agent fees, and it offers an assortment of data-based services to help them with the process.
Opendoor targets customers directly, but it also works with platforms like Zillow and with homebuilders that widen its channels without high marketing costs. These are meaningful, accounting for 40% of acquisition contracts in the 2023 second quarter, and these contracts increased 78% over last year. So while the market is down, Opendoor is leveraging its channels to generate higher sales.
Managing through challenging conditions
Opendoor had $2 billion in sales in Q2, down from $4.2 billion last year. Remember, we’re talking about houses, so sales figures are going to be high.
The company has developed sophisticated artificial intelligence-based tools to accurately assess home conditions and fix the right prices. As it evaluates more homes, it collects more data points, which should lead to an improved AI model over time.
It’s been working through its previously held inventory to focus on a more competitive collection of houses right now, and it’s making progress, with 99% of what it calls its “old book” properties already sold. Those weren’t sold at optimal pricing, affecting overall profitability but moving out the less optimal inventory to focus on higher-quality homes.
Opendoor sold nearly 5,400 homes in Q2, about half of the number last year, and it bought 2,680 homes, 81% fewer than last year, to keep its inventory balanced as fewer people are buying homes.
Getting back to profitability
Getting rid of old homes on its books and selling fewer homes at the same fixed costs is naturally affecting profits. The contribution margin, which measures how far its fixed costs go, was negative 4.6% in Q2 but 10.6% for homes sold from the new book. Management sees the overall contribution margin returning to positive in Q3 as it holds homes mostly from the new book, with a target range of 5% to 7%.
This indicates that Opendoor has a model that works and can be profitable, and management is taking steps to remain efficient despite the ongoing difficulties in the housing market.
Why buy now?
If you believe in Opendoor’s model and can see its long-term potential, it makes sense to buy when the stock is low. Taking a page from the Warren Buffett playbook, now might be an excellent time to invest in housing stocks, since homes are scarce and demand will rise.
Even at the current price, Opendoor stock trades at only 0.2 times trailing-12-month sales. That’s incredibly cheap compared to high-growth stocks. Of course, Opendoor isn’t quite high growth right now. But if you can imagine it will be, this could be an incredible opportunity. Therefore, I don’t think investors have missed out yet. You should only buy the stock, though, if you have an appetite for risk.