1 Growth Stock Down 94% to Buy Right Now

Open door (OPEN -1.03%) has been a tough stock to own over the past few years. Shares of the online real estate company started trading at $31.47 after going public through a merger with a special purpose acquisition company (SPAC) in December 2020, and hit a record high of $35.88 during the peak stock increase from February 2021.

Since then, however, Opendoor shares have fallen 94% to around $2. It crashed and burned as rising interest rates rattled the housing market, stunted growth and drove investors to more conservative investments. However, Opendoor could be an undervalued growth play for investors who can cut through all the near-term noise.

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How bad was Opendoor’s slowdown?

Opendoor streamlines home sales by making instant cash offers on homes, fixing up those properties on its own, and relisting them for sale on its online marketplace. This is different from Zillow and Redfinwhich both shut down their similar home casting services in 2022.

Zillow and Redfin shut down those “iBuyer” businesses because it was a capital-intensive strategy that was difficult to sustain as interest rates rose. Supply chain constraints made it difficult to renovate all the homes they bought, and their own artificial intelligence (AI) pricing algorithms sometimes overvalued targeted properties.

Despite these growing pains, Opendoor stuck with its primary iBuyer strategy and worked with third-party partners such as realtors, homebuilders and Zillow to attract more sellers and buyers. But in 2023, the company’s revenue fell, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) fell and it remained unprofitable. Most of this pressure can be attributed to rising interest rates and a cooling housing market.

Data source: Opendoor. *Based on 498% growth rate reported in 2021.

This slowdown is troubling and even more disappointing compared to the company’s pre-merger outlook to generate $9.8 billion in revenue with a positive adjusted EBITDA margin of 0.1% in 2023. The company has clearly benefited from the feverish growth of housing market in 2021 and 2022 as pandemic-induced headwinds dissipated, but could not sustain this momentum in a high-interest environment.

In the first half of 2024, Opendoor’s revenue fell 47% year-over-year to $2.7 billion and its adjusted EBITDA margin improved to negative 2%, but its net loss widened year-over-year from $78 million to $201 million. However, it still bought 8,229 homes, an 86% increase on the first half of 2023, and sold 7,156 homes.

Opendoor expects its revenue to grow 22%-32% year-over-year in the third quarter of 2024 and finally end its streak of seven quarters of top-line declines. Adjusted EBITDA margin is also expected to remain flat at 5%.

That outlook is shocking, but it suggests the company has crossed a cyclical threshold and has a chance to bounce back as interest rates fall and the housing market heats up. It will also face much less competition following the withdrawal of Zillow and Redfin from the iBuying market.

Opendoor seems undervalued relative to its growth potential

For 2024, analysts expect Opendoor’s revenue to decline 26% to $5.16 billion as adjusted EBITDA improves from $627 million to negative $183 million. But from 2024 to 2026, the company’s revenue is expected to grow at a compound annual growth rate (CAGR) of 35% to $9.47 billion as adjusted EBITDA turns positive in the final year.

We should take these estimates with a grain of salt, but Opendoor is well positioned to grow again as the macro environment improves. And with an enterprise value of $3.27 billion, its stock still looks very cheap at 0.6 times this year’s sales.

Opendoor is still a speculative stock with obvious weaknesses. Its business model is shocking, it ended its last quarter with a high debt-to-equity ratio of 3 and only had $790 million in cash and cash equivalents. But if you think the company can expand its business and disrupt the real estate market with its iBuying model, its stock could rise as growth stabilizes.