OPEN stock is cheap, but don’t buy it before it bottoms out
Following its last liquidation, Open door technologies (NASDAQ:OPEN) fell to around $10 per share. To some, this may seem like a great entry point for the stock OPEN.
For one thing, that’s less than a third of what he traded a year ago, when the excitement was at its peak. $10 per share was also the first price of this former special purpose acquisition company (SPAC), when it went public back in 2020.
But don’t let the much lower price fool you. At today’s valuation, it remains far from some kind of value play. Its $6.6 billion market capitalization remains built entirely on perceived future growth potential, not its current operating performance.
At the same time, there is the risk of possible challenges ahead for the housing market. A cooling in housing is bad news for the company, given its heavy reliance on soaring residential property prices. If it takes another big dip, say at prices on par with some of The other broken SPACs of Chamath PalihapitiyaIIt might be worth taking a look. For now, however, it is best to wait.
Open stock at a glance
Opendoor is one of the leading US iBuyers. What is an iBuyer? It’s basically a digital house mixer. By buying residential properties from landlords using pricing algorithms, iBuyers fix them, resell them quickly for a small profit.
Such a capital-intensive, low-margin business model may not sound like something the growth crowd would love. But last year, when SPAC stocks were in the range, especially those owning companies with “disruptive” business models, OPEN stocks made a move “to the moon”, again at prices north of $30 per share.
Since then, however, sentiment for this game about “the future of real estate” has changed significantly. It’s not just because the speculative hype for blank check companies has long passed. With Zillow (NASDAQ:ZNASDAQ:ZG) throwing in the towel with its iBuying business, reversing high losses in the process, the market became increasingly concerned about the iBuyer business model.
Along with this, with rising rates, growth stock valuations have fallen alongside a higher discount rate. Speaking of interest rates, this factor could do more damage to stocks beyond just causing more multiple compression.
Why this iBuyer could soon find itself in a bind
Much like a homeowner who owes more on a house than it is worth, many OPEN stock holders are underwater on their investment. Paying $20, $30 or even more per share, they’re sitting on big losses, regretting buying that name near the top.
If you are in this position, you of course have two options. One: Cash in, accept the loss and move on. Two: Ride things away in hopes that as the “story” behind Opendoor continues to unfold, it’s on track to return to its highest level. Alas, in assessing the situation, it seems more preferable to opt for option 1 than to opt for option 2.
It could expand to more housing markets in the United States, including its own backyard. But given the direction the housing market is heading, the business could expand at the worst possible time. Yes, so far the prospect of higher interest rates does not appear to have dampened housing demand. Search for “real estate crash” and you’ll get bullish headlines, including benchmark analysis from Zillow saying that house price growth is expected to accelerate this spring (due to lack of supply).
On the other hand, these types of titles might turn out, in hindsight, to be nothing more than clickbait and industry hype. As economist Gary Shilling argued in a recent Bloomberg op-ed, builders increase supply. Demand is down, which could loosen further as rates rise. This could put pressure on housing prices, leaving Opendoor in a bind.
Wait for a “buyer’s market” before buying shares OPEN
With the high risk of a housing market cooling, it makes sense that BofA analyst Curtis Nagle turned bearish on Opendoor shares. Downgrading the stock to the equivalent of “underperforming” with a price target of $8 per share, Nagle worries that this iBuyer has bought too many homes, largely through debt financing.
Additionally, the sell-side analyst argued that iBuyer’s business was untested in a bear market for housing. It is already expected to post losses this year, it could find itself deeper in the red for 2022 if more bearish takes on the direction the housing market is heading eventually prove to be true.
If a cooling in the real estate market pushes it to low prices, give the OPEN action a second look. Until then, it is better to avoid.
At the date of publication, Thomas Niel had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
InvestorPlace.com contributor Thomas Niel has been writing individual stock analysis for online publications since 2016.