House Flipper Opendoor Says It Can Thrive in a Downturn
The stock market has been cruel to
Shares of the online home buyer have crashed 75% since early 2021, when Opendoor and other digital disrupters like
were lavished with fabulous valuations on fast-growing revenue, without having to show profits.
At a recent stock price of $7.30, Opendoor (ticker: OPEN) is valued at about $7.5 billion, including some $2.5 billion of debt—or a little more than 40% of the $18 billion in sales that analysts forecast for this year. Barron’s recommended the stock in December when it was trading at $15.
Opendoor executives now find themselves pressed to explain and justify the computerized home-flipper’s approach, even after reporting a sevenfold jump in first-quarter revenue, to $5.7 billion, with solid free cash flow from operations. The company bought 9,000 homes during the quarter and sold 12,700, after fixing them up and flipping them in about 90 days.
Chief Financial Officer Carrie Wheeler says that investors in Opendoor stock seem worried that mortgage rates are rising and home-price appreciation cooling. The company has made money through five years of ups and downs in home prices, she notes.
In times of uncertainty, argues Wheeler, consumers value the company’s quick, cash offers. “This is what we were meant to do,” she says.
Investors lost confidence in home iBuyers last fall, when
(Z) said it would exit from the business after running up losses. Opendoor and competitors like
(OPAD) have spent the ensuing months explaining why they can succeed where Zillow flopped.
Opendoor’s presentations to investors now drill deep down into its business, to show how it manages risk and turns its inventory. Its average profit margin on the homes it sold in the first quarter was 6.4%. Although that was down from the 10.2% earned in the red-hot market of the year-earlier period, Opendoor remains comfortably above its target average of around 5%.
Apart from that financial crisis, U.S. homes prices have risen through economic cycles since the 1970s, says Daniel Morillo, Opendoor’s chief investment officer. Outside of 2008 to 2010, there have been only a half-dozen quarters in which home prices declined. Even in the thick of the subprime crisis, the worst year-over-year quarterly drop in home prices was 3%, says Morillo. And today’s setting is very different. Consumers are in a healthier state. The supply of homes for sale is much lower than in 2008.
“We are prepared for a slowdown,” Morillo says. “But we don’t expect it to be anything more than a gradual decline in home-price appreciation.”
The dispersion of Wall Street’s forecasts for Opendoor is narrowing. Valuing the company at 5.9 times his estimates for this year’s gross profit, Wedbush analyst Ygal Arounian raised his price target after the March-quarter results to $13 from $11, suggesting a gain of more than 75%. Oppenheimer’s Jason Helfstein lowered his price target to $14 from $18, which is 10 times his discounted forecast for 2025 profits. Both rate Opendoor stock a Buy. b
Write to Bill Alpert at firstname.lastname@example.org