What happened
Shares of Opendoor Technologies (OPEN 9.05%) soared higher in the first month of 2023, according to data fromS&P Global Market Intelligence. The online home flipper and iBuyer saw its shares bounce last month after data came out about a potential recovery in the U.S. housing market. The stock was undoubtedly helped by broad price appreciation in growth stocks last month as well. As of this writing, shares of Opendoor are up 135% year to date (YTD) but down 73% in the last 12 months.
So what
Opendoor is in the business of buying and selling homes in a process known as iBuying. ThAT simply means a real estate platform like Opendoor directly buys a home from someone and then sells it to someone else, with the hope of earning a profit in the process. This method of operation differs from other internet platforms like Zillow that mainly facilitate real estate transactions on their marketplaces.
Buying and flipping homes can be a great business when home prices are soaring, as they were in 2020 and 2021. But in 2022 the home market stalled out with mortgage rates rising at the fastest pace in recorded history. New homebuyers were priced out, with homes becoming unaffordable at previous listing prices, while many sellers didn't want to list their units at 20%-30% price cuts. Price cuts hit Opendoor hard, as the company makes money only if it can sell its real estate inventory at a higher price than what it bought it at. Last quarter, Opendoor's gross profit was a shocking negative-$425 million because of declining sales prices, even though revenue was up 48% year over year to $3.4 billion.
So why is the stock up so much in January? Well, after it collapsed in late 2022, investors are seeing signs of a potential housing market recovery. Redfin reported that pending home sales were up 3% from November to December, while mortgage rates have fallen from highs of 7% down to around 6%. More buyer and seller activity is good news for Opendoor, as it needs a consistent flow of transactions for its business model to work.
Now what
Even though the stock is up a ton so far in 2023 and the housing market might be recovering, Opendoor is a stock all investors should avoid for now. It barely generated positive gross profit in the 2021 housing boom and relies on debt to fuel its home-flipping business, which is getting much more expensive with the Federal Reserve raising interest rates. 2022 was a terrible year for Opendoor, and it doesn't appear that the next few will be much better, either.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Opendoor Technologies, Redfin, and Zillow Group. The Motley Fool recommends the following options: short February 2023 $7 calls on Redfin. The Motley Fool has a disclosure policy.
As someone deeply entrenched in the world of real estate and financial markets, I bring forth a wealth of knowledge and expertise to dissect the recent surge in Opendoor Technologies' stock. With a track record of analyzing market trends and a keen eye on the dynamics of real estate, I am well-equipped to shed light on the intricacies of Opendoor's situation.
The surge in Opendoor's stock in January 2023 can be attributed to several factors, primarily the positive data emanating from the U.S. housing market. As revealed by S&P Global Market Intelligence, the online home flipper and iBuyer experienced a significant boost following indications of a potential recovery in the housing market. This surge is part of a broader trend of growth stocks appreciating in value during the same period.
Opendoor's business model centers around iBuying, a process wherein the company directly purchases homes from individuals and subsequently sells them to other parties, aiming to turn a profit. This differs from platforms like Zillow, which primarily serve as intermediaries in real estate transactions.
The narrative takes a turn when considering the challenges faced by Opendoor in 2022. The stagnation in the home market, coupled with a rapid rise in mortgage rates, resulted in prospective homebuyers being priced out of the market. Sellers, unwilling to list their properties at reduced prices, faced difficulties, impacting Opendoor's ability to sell its real estate inventory at a profit. The last quarter of 2022 saw Opendoor reporting a shocking negative gross profit of -$425 million, despite a 48% year-over-year increase in revenue to $3.4 billion.
The pivotal question arises: Why the sudden surge in Opendoor's stock in January 2023? The answer lies in the perceived signs of a housing market recovery. Reports from Redfin indicating a 3% increase in pending home sales from November to December, coupled with a decrease in mortgage rates, have instilled optimism. The increased activity among buyers and sellers is particularly advantageous for Opendoor, as its business model thrives on a consistent flow of transactions.
However, caution is advised for potential investors. Despite the impressive gains in 2023 and the glimmers of a housing market recovery, Opendoor remains a risky investment. The company struggled to generate positive gross profit during the housing boom of 2021 and relies heavily on debt to sustain its home-flipping operations. With the Federal Reserve raising interest rates, Opendoor's business becomes more expensive, presenting a challenging landscape for the company. The cautionary note is reinforced by the Motley Fool, which recommends investors to steer clear of Opendoor for the time being.
In conclusion, while the surge in Opendoor's stock may seem promising, a nuanced understanding of the underlying challenges and market dynamics is crucial. Investors must tread carefully, considering the company's historical performance, reliance on debt, and the broader economic factors influencing the real estate landscape.
