Will Rate Cuts Supercharge Opendoor Stock’s Rally?

Opendoor Technologies stock (NASDAQ:OPEN), the online real estate platform that lets people buy and sell homes while also offering title and escrow services, had a rough start to the week with shares dropping nearly 9% on Monday. That said, the stock is still up about 13% over the past five trading sessions. What’s driving the big swings? Last Friday, Fed Chair Jerome Powell broadly hinted that an interest rate cut could be coming in September, sparking a rally in risky, rate-sensitive names such as Opendoor. Lower rates tend to be a big positive for the housing market since they bring down mortgage costs, which can lift demand for homes and boost transaction volumes on Opendoor’s platform.  However, the excitement didn’t last long, as Monday’s sell-off showed that investors are still nervous about the unknowns around how many cuts  and how big they could be. So is now really the moment to buy into Opendoor stock?

Image by Paul Brennan from Pixabay

Memestock Mania And AI Power The Stock

Now, Opendoor stock has done exceedingly well this year, rising by almost 3x since early January. Open-door has drawn renewed attention as a meme stock – a term used for stocks that surge largely due to hype on online forums and retail trading momentum, rather than on fundamentals. Moreover, the short interest has been elevated as this results in sharp price spikes when trading activity intensifies. That said, shares are still down by almost 90% from their SPAC-era peaks, an indicator of the role sentiment and momentum are playing on the stock. The rally has also been supported by a few company-specific developments. Opendoor has talked up integrating generative AI into its operations in areas such as pricing engines, marketing, and in-home assessments.

Management has suggested that AI could help improve pricing accuracy, reduce operating costs, and make home valuations quicker. This could give the company an edge in a low-margin industry. The company also recently announced its CEO would step down, a move investors greeted with enthusiasm, even through the rationale remains unclear. The company’s second-quarter results also modestly beat expectations, with both revenue of $63 million and EBITDA of $6 million coming in ahead of projections. Separately, here’s How UnitedHealth Stock Surges To $600

Lots Of Risks

While Opendoor’s stock has been on a tear, a closer look at the key numbers reveals a business under pressure. At first glance, its Price-to-Sales multiple of 0.6x looks cheap compared to the S&P 500’s 3.3x. But this multiple is a bit misleading, considering that Opendoor books the entire home sale price as revenue rather than the spread it actually earns. It’s also notable that its margins are razor-thin (or negative) and the business is highly sensitive to cyclical market conditions. The company’s top line has shrunk at an average of 24% annually over the past three years, although revenue did rebound 14% in the last 12 months to $5.2 billion and rose 3.7% year-over-year in the latest quarter.

Losses also persist, with operating income standing at negative $204 million (a -3.9% margin) for the last 12 months. Opendoor carries $2.2 billion in debt, largely tied to financing its housing inventory. Although this is common in the instant buying model, it is risky given the thin margins and exposure to housing market swings. The company’s current market cap is $3.3 billion and this implies a Debt-to-Equity Ratio of 66%. That said, the cash of $789 million does provide some cushion for the stock.

While OPEN stock appears risky, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming its benchmark that includes all 3 – S&P 500, Russell, and S&P midcap. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.