Buying Opendoor Technologies (NASDAQ:OPEN) would be a no-brainer if it were just a technology platform. OPEN stock sits 45.6% below its Feb. 26 high.
But the digital real estate transaction system decided to get high on its own supply. It began buying homes itself, riding the crest of the industry wave. With real estate prices teetering at all-time highs, and homes unaffordable to most people, that represents risk.
The risk comes in multiple forms. Housing prices could fall, cutting the value of Opendoor inventory. The San Francisco home tech may get outbid on deals, cutting deal flow.
That seems to be what has happened since OPEN stock’s December market debut. Revenue for the March quarter was down. Opendoor lost $278 million, 48 cents per share, against $62 million a year earlier. The saving grace was its sale of stock, increasing the float from 84 million to 565 million, so the earlier year’s per-share loss was 74 cents.
Big Losses, or Not?
That’s not the way management spun it in its shareholder letter.
Management said it bought 3,594 homes, sold 2,462, and ended the quarter with 2,958 homes on the balance sheet, worth $841 million. The company launched in six new markets, bringing the total to 27, and said it planned to be in 42 by the end of the year.
I’ve written negatively about Zillow Group (NASDAQ:ZG) for becoming a home buyer. While the two platforms are different, with Zillow focused on showing homes and Opendoor on the transaction process, they’re both home buyers. That’s how the market has looked at it, too. Zillow is down 18.4% on the year, and Opendoor 32.9%.
The Real Estate Problem
Of all the businesses in America, residential real estate is the one most desperate for digital disruption. You lose 15% of your equity with every step in the process, from the commissions on each side and the cost of moving your stuff.
Also, homes don’t really appreciate. They need upkeep. Yes, I bought my home for $49,500 in 1984 and it may be worth $630,000 today, according to Zillow. But between additions, renovations and maintenance, I’ve also put $500,000 into it.
That’s not how most people look at it. They use their homes as piggy banks, refinancing at every opportunity, focusing only on the monthly “nut” of the mortgage payment. They move regularly, again focusing solely on the monthly cost and their own desires to grow their family, raise it, then downsize in older age.
The only thing that keeps the ride spinning is rising prices, held up by limits on new construction, ancient construction techniques and the high cost of doing the business. It’s this last that Opendoor promised to reduce. As one analyst put it, it’s “a convenient and lower-friction method” for selling your home but “its fees are typical of market standards.”
In short, it’s pocketing the savings, going along with high transaction costs in its own interest rather than disrupting the market.
The Bottom Line
Opendoor’s falling stock price represents a danger sign for the real estate market.
Its decision to be a real estate speculator rather than a market maker may be why Cathie Wood’s ARK Next Generation Internet ETF (NYSEARCA:ARKW) recently sold 1.3 million shares.
Opendoor isn’t a tech company, but an “iBuyer,” as the Raleigh News & Observer described it in a data-driven analysis of the company’s “home buying spree” in North Carolina’s richest county. If you’re buying OPEN stock, you’re buying a real estate speculator, not a transaction platform.
Not everyone agrees. Our David Moadel says the stock’s recent fall makes it more “investable.” Our Luke Lango thinks Opendoor will heat up as the market cools off.
I don’t think so. If housing prices reverse, Opendoor will be just another speculator. Maybe its platform will let it get out with its shirt. But I doubt it. I think they’re addicted.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future, now available at the Amazon Kindle store. Write him at [email protected] or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.