Why I Wouldn’t Touch Opendoor Stock With a 10-Foot Pole

Newly-minted meme stock Opendoor (NASDAQ:OPEN) has seen incredible volatility this year, with shares of OPEN stock surging from a low of around $0.50 per share to as high as $10.87 per share (better than a 20-bagger for investors who timed this move right). 

Much of this has to do with the company’s inclusion in the Roundhill Investments meme stock ETF, which resulted in interest in this name from retail investors surge. Indeed, Opendoor is a company with all the makings of a meme stock, from a relatively low float to a very low share price (making options bets on the company cheaper) and plenty of retail investor interest.

That said, given the recent turmoil we’ve seen build in the market in recent weeks, it does appear this meme trade in OPEN stock could be coming under pressure. Here’s why this is one particular stock I’m steering well clear of during this point in the market cycle. 

Deteriorating Fundamentals

If Opendoor was a company with a rock-solid balance sheet that got beaten down by the market for rather nebulous reasons, this wouldn’t be such a terrifying selloff for investors in this name.

However, I’d argue this stock’s roughly 40% decline from its recent peak is one investors should view as mostly fundamentals driven. 

Opendoor’s underlying fundamentals were weak heading into this year (there’s a reason the stock was trading in penny stock territory to begin with). That said, I’d point investors to the company’s most recent Q3 results, which showed continued weakness in fundamentals. 

Revenue declined 33% on a year-over-year basis this past quarter (dipping below $1 billion), with gross margins absolutely crashing from 37% to just 7.2%.

That’s a massive decline, and led to an even wider loss than most analysts and market participants were clearly hoping for, with Opendoor bringing in a loss of $90 million for the quarter.

What’s Driving These Poor Results?

Opendoor’s weakening fundamentals tell the story of a company that’s mired with operational inefficiencies at a time when declining market demand and other mounting financial pressures are weighing on the company’s ability to grow (and do so profitably). 

It would be one thing if Opendoor had a positive outlook for investors to hang on to. But this past quarter, the company put forward guidance that suggested Opendoor’s revenue could decline another 35% in the coming year. That would mean sequential drops of more than 30% year-over-year, indicating this is a company in significant trouble.

Give the current unaffordability crisis in the housing market, and relatively low home purchase and resale velocity in key markets, there’s not a lot investors can look at from a fundamental perspective to give any sort of solace that this downturn is likely to be over. 

While the company is targeting breakeven adjusted net income by the end of next year, it’s clear that execution risks are very high with this name. For now, I don’t see anything material that would justify a positive earnings outlook for this stock for at least three years, and that’s a long enough window that I think many meme stock investors will likely move on to the next hot stock. 

Where to Go From Here?

Of course, I’m one of the more bearish folks following Opendoor, and there are others that will disagree with my view that this is a fundamentally-decrepit stock to invest in right now. 

But the reality to me is clear: Opendoor’s pathway to profitability has gotten much murkier, due to a confluence of factors including market weakness and idiosyncratic inefficiencies. Until Opendoor can prove it’s able to provide at least margin improvement in the near-term, I don’t think this is a stock any investor concerned with capital preservation can own right now.