Do Not Buy OPEN Stock

Opendoor Applied sciences (Nasdaq: OPEN) is an organization that’s revolutionizing the house shopping for course of. Opendoor will ship you a money supply when promoting your private home, basically letting you purchase or promote a house out of your telephone.

Over the previous 5 years, OPEN inventory is down over 70%. With this in thoughts, some traders is perhaps considering shopping for the dip on this as soon as buzzy tech inventory. Listed here are my ideas on why you shouldn’t do this.

The State of America’s Housing Market

Opendoor’s enterprise mannequin is closely depending on the actual property market. When the market is booming, Opendoor will doubtless promote extra homes and OPEN inventory will soar. However, America’s actual property market in all probability received’t increase anytime quickly. Plus, there’s the truth that the Nationwide Affiliation of Realtors simply abolished fee charges. First, let’s speak concerning the housing market.

Over the previous 12 months or so, the Federal Reserve has raised rates of interest on the quickest tempo in a long time. For house patrons, this has resulted in dramatically larger mortgage charges. In 2021, the typical mortgage charge was roughly 3.% However, in 2024, the typical charge is now hovering round 7%. In different phrases, it’s greater than twice as costly to purchase a house now than it was simply two years in the past. This, amongst different elements, is inflicting a slowdown in house shopping for.

In line with the Nationwide Affiliation of Realtors, the variety of present house gross sales has been on a downward pattern for many of final 12 months (till spiking final February). I predict that this pattern will proceed for the foreseeable future, which is able to doubtless be a significant headwind for OPEN inventory.

The overall consensus amongst actual property specialists is that many house patrons are locked down by “golden handcuffs.” Because of this tons of individuals secured 3-4% mortgages throughout the early 2020s. Now, these owners haven’t any incentive to maneuver once more since they’d be taking up a brand new mortgage that’s nearer to 6-8%. The result’s a stagnant actual property market, with a big share of people that merely haven’t any incentive to maneuver. Once more, that is dangerous information for OPEN inventory, which makes cash by serving to folks purchase and promote properties.

On prime of that, America’s actual property market was not too long ago dealt one other huge curve-ball.

The NAR’s Latest Resolution

The Nationwide Affiliation of Realtors (NAR) not too long ago agreed to settle an antitrust class motion lawsuit for $1.8 billion. As a part of this ruling, the NAR will get rid of guidelines on commissions. This ruling will make it simpler for patrons to barter charges with their very own brokers or use no brokers in any respect – basically ending the 6% commonplace fee that brokers beforehand earned.

It’s a bit unclear how the NAR’s settlement will impression the actual property trade. For instance, the house-selling platform, Zillow (Nasdaq: Z) has highlighted the next concern:

“If agent commissions are meaningfully impacted, it may cut back the advertising and marketing budgets of actual property companions or cut back the variety of actual property companions taking part within the trade, which may adversely have an effect on our monetary situation and outcomes of operations.”

Carrie Wheeler, Opendoor CEO, posted a weblog along with her ideas concerning the NAR choice. She actually didn’t say an excessive amount of on how this may impression their enterprise. As a substitute, she primarily acknowledged that Opendoor stands by the rule change as a result of it advantages shoppers – which Opendoor is in favor of. Studying by means of the company communicate, I interpret this as an admission that the NAR’s choice received’t materially profit Opendoor. If Opendoor was assured that no extra agent commissions would profit them then they’d be shouting it from the mountaintop – not making obscure statements about the way it advantages the patron.

I personally suppose that the discount of agent commissions shall be a internet unfavourable for Opendoor. Considered one of Opendoor’s worth propositions is you can mitigate charges related to going by means of the normal home-selling course of. If agent charges get diminished over the approaching years then it should make Opendoor much less enticing to make use of.

OPEN Inventory: Final 3 Quarters

Along with these trade headwinds, there’s additionally the truth that Opendoor’s previous couple of quarters have been fairly terrible:

Income: $870 million (-70% yearly)
Internet revenue: $-91 million (+77% yearly)

Income: $980 million (-70% yearly)
Internet revenue: $-106 million (+88% yearly)

Income: $1.98 billion (-52% yearly)
Internet revenue: $23 million (+142% yearly)

So, straight away we are able to see a couple of issues. Opendoor’s income has cratered from $1.98 billion final June to only $870 million in December. Opendoor can be having hassle persistently turning a revenue. Alternatively, Opendoor’s annual share will increase in internet revenue look spectacular at face worth. 

Nevertheless, these will increase are a bit deceptive as a result of the corporate misplaced $1.35 billion final 12 months. Whenever you lose over a billion {dollars} in a single 12 months, dropping just some million the following 12 months appears to be like like a large win by comparability the following 12 months. It’s like making $1 in 12 months 1, $2 in 12 months 2, after which reporting a 100% enhance in income. It’s technically true. However, you continue to solely made $2.

So, what’s the ultimate verdict for OPEN inventory?

Ought to You Purchase OPEN Inventory?

I personally like what Opendoor is doing as an organization. There’s a large want for extra comfort and transparency in the actual property market, which is an enormous a part of Opendoor’s mission. The corporate has additionally executed an ideal job weathering a once-in-a-lifetime pandemic and financial atmosphere. It’s actually spectacular that the corporate continues to be standing regardless of the turbulence of the previous few years.

However, with that mentioned, I don’t suppose OPEN inventory goes to rally anytime quickly. This actually doesn’t have a lot to do with the corporate itself. It’s the stagnation of America’s actual property market. Elements like drastically larger rates of interest, a slowdown in shopping for, and a NAR choice that can have untold impacts on the trade all pose huge headwinds for Opendoor over the approaching years. In my view, these points will maintain Opendoor again, which implies that OPEN inventory will wrestle.

I hope that you just’ve discovered this text precious in terms of studying why you need to keep distant from OPEN inventory. If you happen to’re serious about studying extra, please subscribe beneath to get alerted of latest articles.

Disclaimer: This text is for basic informational and academic functions solely. It shouldn’t be construed as monetary recommendation because the creator, Ted Stavetski, is just not a monetary advisor. Ted additionally doesn’t personal shares of Open Inventory.