The journey of Opendoor Technologies Inc. (NASDAQ: OPEN) has been tumultuous. On February 11, 2021, its shares soared to an all-time closing high of $35.88, only to plummet to a mere $1.87 by the market close on Thursday. This staggering decline represents a loss of over 94 percent.
Is it time to buy this dip?
For those unfamiliar with Opendoor, it operates as an online iBuyer, specializing in the purchase and sale of residential real estate. The company offers swift cash offers to homeowners through its efficient web platform, making the selling process convenient and hassle-free.
Homeowners who opt for Opendoor can sidestep the typical frustrations associated with real estate agents. They do not have to endure showings, open houses, or visits from curious neighbors traipsing through their staged homes.
In essence, selling a house through Opendoor is as straightforward as offloading an old pair of pants on eBay. The service fee charged by Opendoor is on par with standard real estate agent commissions.
Once Opendoor acquires a property, the transformation begins. They typically apply a fresh coat of paint to the walls before placing it back on the market.
The core business model revolves around reselling the house for a price that exceeds the initial purchase price plus renovation costs. This fee structure acts as a buffer to manage the timeframe between buying and selling a home.
Furthermore, Opendoor’s NASDAQ listing offers everyday investors the chance to engage in real estate speculation without needing to physically flip houses or get paint on their hands.
However, a 94 percent loss is not what many shareholders anticipated. So, what’s the reason behind this dramatic downturn?
Algobot Blind Spots
During periods of low-interest rates and rising home prices, it’s astonishing how a splash of paint can greatly enhance a property’s perceived value. But when these conditions shift, as they did in 2022, even the most sophisticated iBuyers equipped with advanced algorithms can be left bewildered.
As stated on the company’s website:
“Opendoor has developed a valuation algorithm that evaluates hundreds of comparable properties for any address. We adjust valuation based on location, home improvements like granite countertops or finished basements, and even less tangible aspects such as road noise, blending this data analysis with insights from local real estate experts.”
One might assume an algorithm that considers high-quality details would yield an optimal price—neither too high nor too low. However, this algorithm neglects a critical factor: the cost of credit. When mortgage rates rise, home prices inevitably must adjust downwards to compensate for increased financing costs, revealing a significant blind spot in the algobot’s calculations.
For instance, on April 20, Opendoor purchased a two-bedroom, one-bath bungalow in Denver’s West Highland neighborhood for $779,000. After a fresh coat of paint, it was listed for $870,000. However, nearly six months later, the home sold for $625,000—an alarming $154,000 loss compared to the purchase price.
Heavy Hearts
This situation wouldn’t be overly alarming if it were an isolated incident, yet it’s a recurring theme.
In Denver County, for example, out of 36 Opendoor house sales recorded between June 1 and October 21, 19 transactions closed for less than what Opendoor originally paid. This trend is likely seen in other markets as well, implying broader market challenges, which have also led to job losses.
On November 2, CEO and Co-Founder Eric Wu communicated through a blog post:
“Team, the best leaders operate with both their intellect and empathy. It is with a heavy heart that I share some difficult news today. For those who missed the Open House, we’ve made the hard decision to reduce our team by approximately 550 individuals across all departments—around 18% of our workforce.”
Opendoor is not alone in facing these hardships; other iBuyers like Better.com have undergone numerous layoffs, while Redfin and Compass collectively downsized their staff by 900 workers in June.
As Opendoor navigates challenges in accurately valuing properties for profitable resales, the stock market has maintained a stern stance on share pricing.
When Opendoor went public in December 2020, it closed its first day of trading at $31.25. Just two months later, shares peaked at $35.88. Since then, it has witnessed a gradual decline. As of Thursday’s market close, shares traded at $1.87, slightly above the 52-week low of $1.46. This drop results in a diminished company valuation of $1.18 billion, a stark contrast to its $8 billion value in 2021.
So, what does this all mean?
Opendoor: Buy the Ticket, Take the Ride
Analyst Luke Lango suggests that investing in Opendoor now could be akin to buying Amazon stock in 1997. His comprehensive research leads him to believe it could transform into the “Amazon of houses” during the next decade, potentially dominating the multi-trillion-dollar housing market.
This assertion is bold, indeed. Investing in Opendoor now could also resemble purchasing Webvan in late 2000.
For those unaware, Webvan was among the earliest online grocery platforms. Following a sky-high IPO, shares hit $25.44 on December 3, 1999, only to crash to zero in just 19 months, resulting in bankruptcy.
For every revolutionary stock like Amazon, numerous others flop like Webvan. Nevertheless, embracing bold claims isn’t unwarranted, and it seems Mr. Lango may just be onto something.
“Audentes fortuna iuvat”—fortune favors the bold—were the parting words of Pliny the Elder while embarking on a daring rescue amidst the eruption of Mount Vesuvius in AD 79. Moments later, he succumbed to a cloud of hot toxic gas.
Indeed, fortune may smile on the daring, but peril also lurks for the audacious.
Thus, it is crucial to stress that purchasing shares of Opendoor should not be viewed as a solid investment strategy. Instead, it resembles an impulsive gamble on a thrilling ride.
At best, one could strike it rich. At worst, the ride could be tumultuous. Nevertheless, the excitement is undeniable.
“Buy the ticket, take the ride,” advised the late Hunter S. Thompson.
At just $1.87 per share, spending a bit of pocket change on Opendoor can indeed be an exhilarating experience.
[Editor’s note: While the concept of anti-investments has its place, genuine wealth building arises from taking calculated, strategic risks. True investing requires thorough due diligence developed over nearly two decades of experience. For those interested in discovering real investment opportunities that could bolster their portfolio during market downturns, consider exploring the Financial First Aid Kit. Here, you’ll find essential insights for safeguarding your wealth and privacy amid a shifting global economy.]
Sincerely,
MN Gordon
for Economic Prism
Return from Opendoor; Buy the Ticket, Take the Ride to Economic Prism
