Opendoor is down 53% so far in 2024. Is it a buy before the Fed starts cutting rates?

Open door (OPEN -1.87%) is down 53% so far in 2024 and what makes this even more interesting is that most real estate tech stocks like Zillow and Redfinthey perform much better.

Moreover, Opendoor recently reported Q2 results that even exceeded management’s expectations. So, with the Federal Reserve set to start cutting interest rates and a general sense of optimism that the housing market is about to pick up, now is a great time to buy Opendoor while it’s so down ?

Opendoor’s strong second quarter numbers

Despite a persistently sluggish housing market, Opendoor delivered impressive results in the second quarter. The company bought 4,771 homes, up 78% year-on-year and significantly higher than its guidance called for. It sold 4,078 homes, so it built up its inventory a bit.

Additionally, contribution margin, a measure of profitability that takes into account the costs of owning a home on the balance sheet, was 6.3 percent, well above the 5.4 percent to 5.7 percent range for which the company had proposed it. On an adjusted EBITDA basis, Opendoor lost $5 million for the quarter, much better than the $30 million loss expected in mid-point guidance.

It wasn’t just about the strong numbers

At first glance, these numbers might seem very strong. And they were. But the most significant part of the second-quarter earnings report wasn’t what happened in the second quarter. It is what is expected in the future.

In the letter to shareholders, Opendoor management said the company had experienced an unexpected price drop in June and that the company had increased house-level price drops in response to meet sales targets.

In short, Opendoor expects the third quarter to be significantly weaker than many expected, and the guidance looks like the company is taking a step back in the middle of what should be a seasonally active quarter for home sales .

The mid-point revenue forecast of $1.25 billion would represent a sequential decline of about 17%. More significantly, the contribution margin is expected to drop from an acceptable 6.5% to an abysmal 2.9% to 3.5%. As a result, adjusted EBITDA loss is expected to widen to $60 million to $70 million, a great bounce back from last quarter’s $5 million loss.

The bottom line

To be fair, Opendoor’s management specifically pointed out that it based its third-quarter guidance on current information. And while the third quarter may indeed be a step back, regardless of what the Fed does or says — after all, we’re already two months in — it’s entirely possible that the rate cut will be a tailwind back for Opendoor. Plus, with about $1.2 billion in equity, including about $800 million in cash, Opendoor certainly has the flexibility to get through a rough quarter or two.

However, the business may struggle to show investors the true path to profitability unless rates fall by a significant amount. and the volume suddenly increases. Even then, it could be an uphill battle. Management is certainly doing a good job taking full advantage of a terrible real estate environment, but before I invest I should see a clearer path to profitability and, more importantly, more stability of the numbers in a slower-than-expected market than third quarter guidance indicates.