Better Real Estate Stocks to Buy: Opendoor Vs. Redfin

Opendoor technologies (OPEN 2.38%) and Redfin (RDFN -1.58%) they are cut from the same cloth in many ways. Both are real estate tech stocks aiming to disrupt the massive real estate industry. They have a lot of exposure to the housing market, which has sunk both stocks in the post-pandemic crisis.

As the chart below shows, Opendoor and Redfin are both down sharply from their previous peaks.

OPEN data by YCharts.

Both stocks are down about 90% from their pandemic-era peaks, but as investors eagerly await interest rate cuts due to begin in September, Redfin and Opendoor are surging.

As of August 27, Redfin is up 75% from where it closed on August 7, while Opendoor is up 49% over the same time frame.

These rallies make sense. Investors now expect the Federal Reserve to cut benchmark interest rates in September, especially after Jerome Powell’s comments last week. Lower mortgage rates should help revive the struggling housing market, boosting Opendoor and Redfin.

But if you’re trying to choose between these two stocks, which is the better one to buy today? Let’s take a look to see who comes out on top.

Image source: Getty Images.

Opendoor vs. Redfin: Business Model

Although Opendoor and Redfin position themselves as tech-forward real estate disruptors, they operate with different business models. Opendoor is essentially pinball at home. The company seeks to buy homes and resell them at a higher value after making modest repairs or improvements that, in addition to a 5 percent service fee, it typically charges to the seller.

Opendoor aims to disrupt the real estate market by introducing a form of home selling that it believes is easier and more efficient than the traditional route. By selling to Opendoor, a seller can avoid finding an agent, preparing the home for showings, hosting viewings, waiting for offers and negotiating repairs, as well as the risk of the seller pulling out.

Redfin, on the other hand, operates as an online real estate brokerage. The company charges most home sellers a commission of 1%-1.5%, compared to the standard rate of 2.5%-3% of traditional brokerages. However, this could change after the National Association of Estate Agents (NAR) settlement.

In addition to the traditional brokerage business, the company offers rental, mortgage and title services in an effort to be a one-stop shop for prospective homebuyers. Redfin previously had a home flipping business similar to Opendoor called Redfin Now, but it shut it down in 2022 because it was losing money and it was too hard to accurately predict prices.

Opendoor vs. Redfin: financial

Both Redfin and Opendoor have historically been unprofitable, especially amid challenges in the real estate market. Redfin was briefly profitable on an operating income basis during the pandemic, while Opendoor has never been profitable on an operating income basis since going public, though it came close in 2022 before mortgage rates kicked in to grow

In its most recent quarter, Opendoor reported gross profit of $129 million on revenue of $1.51 billion and a loss before interest, taxes, depreciation and amortization (EBITDA) of $5 million. Opendoor’s numbers improved substantially from the year-ago quarter as the company shed its overpriced inventory.

Redfin’s revenue rose 7% to $295.2 million in the second quarter, and its gross profit rose 9% to $109.6 million. It also reported flat adjusted EBITDA, up from a loss of $6.9 million in the second quarter.

Opendoor vs. Redfin: rating

Valuing the two companies is difficult because they are not profitable. Revenue is also a poor metric to use with Opendoor, as its revenue is essentially pass-through revenue from the sales of homes it buys. It can easily generate unprofitable income.

Perhaps the best way to compare the two companies in terms of valuation is to use gross profit. The two companies have similar valuations, with Opendoor trading at 4.1 times gross earnings, while Redfin is valued at 3.9. The difference is negligible.

Opendoor vs. Redfin: Which is the best buy?

As you can see from the comparisons, the two stocks have a lot in common, including similar valuations, financial challenges and disruptive but unproven business models in the real estate industry.

Of the two companies, Redfin seems to have a slight edge right now. The brokerage model is profitable in a healthy real estate environment, and Redfin could benefit from the NAR settlement, which could encourage more agents frustrated by what could be lower commissions from traditional brokerages to work with Redfin.

Redfin also seems better positioned to capitalize on lower rates, as that seems likely to bring homebuyers back into the market and spur a rebound in the inventory of homes for sale. Opendoor is banking more on house prices rising, but that may be more difficult as they are already at all-time highs.

Between the two, Redfin seems like the best way to play the real estate recovery, but investors looking for a range of options wouldn’t be remiss to buy Opendoor stock. Both stocks have great upside potential as the housing market comes back to life.