Why Opendoor Stock Dropped 19% in July
Key Points
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High interest rates and a stubborn housing market are negative signals for Opendoor’s business.
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The company is making progress on its goals of increasing velocity, improving unit economics, and driving operating leverage.
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Second-quarter revenue came in below Wall Street’s expectations, as did the outlook for third-quarter revenue.
Opendoor Technologies(NASDAQ: OPEN) stock lost 19% in July, according to data provided by S&P Global Market Intelligence. The market is worried about high interest rates, stubborn high mortgage rates, and whether or not Opendoor can make a comeback in this climate. The stock has already fallen further after its second-quarter earnings report on Aug. 4.
Home flipping, the digital way
Opendoor is an ibuyer, which means it buys up homes, renovates them, and flips them for a quick resale and profit. It has expanded to partnerships with on-the-ground real estate agents, a mortgage product, and innovative services like its highly successful cash now, more later product that gives home sellers the option to get cash for their homes at sale to Opendoor, with the potential for more when Opendoor sells it.
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New CEO Kaz Nejatian has made several moves to get the company back in growth mode despite the challenging operating environment. He’s leaning more into artificial intelligence (AI) to become more efficient and cut costs, has launched the cash now, more later product, and, most critically, has revamped the model to focus on volume rather than spread. While spread, or the amount the company buys a home for vs. how much it sells for, would seem like the logical way to go economically, there were fewer homes to buy, and they weren’t the best ones. Nejatian’s way gets better homes and smaller spreads for faster sales, driving a positive cycle.
Image source: Getty Images.
He now has three quarters under his belt as CEO, and the results are demonstrating momentum. The year-over-year results remain unfavorable as the new system plays out, but revenue increased 23% quarter over quarter, and gross margin improved from 8.2% to 9.7% year over year, despite a drop in gross profit from $128 million to $86 million.
The new model does seem to be working. Management’s three goals have been to scale velocity, improve unit economics, and build operating leverage. In the second quarter, it accomplished all three; home acquisitions increased 77% from the previous quarter, and it purchased 4,378 homes, up from 1,757 last year. Homes on the market for 120 days or more declined from 10% last quarter to 9%, in contrast with a 27% industry average. And operations expense per acquisition close fell from $5,000 last year to $3,000 this year.
So why’s the stock down?
Despite clear progress, the report wasn’t up to snuff for Wall Street. Analysts were looking for $905.9 million in revenue, while Opendoor reported $883 million, a major miss.
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The revenue outlook was also disappointing. Wall Street was looking for 25% growth, while management is guiding for a 20% year-over-year increase.
Management maintains that it’s already profitable for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) on a 12-month, go-forward basis, and it expects to be profitable for adjusted net income on a 12-month, go-forward basis by the end of the year. At that point, the stock might pick up.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.