The housing market has been weak for a few years. High interest rates make it more difficult for many first-time homeowners to get a mortgage, and also increase the overall price a buyer pays for a home.
But with interest rates falling and people tired of waiting, change is already happening. That means now is the time to make your move on real estate and related stocks, many of which are still well below previous highs.
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Buyer and real estate platform Opendoor technologies(NASDAQ: OPEN) has suffered sales declines and losses, and its shares are down 96% from their all-time highs. It trades at a dirt-cheap price-to-sales ratio of 0.2, which reflects how the market views it today.
But in five years it could look very different, and you might regret not buying it at this price.
Interest rates have had a strong impact on the real estate market, so it’s no surprise that many of them have been struggling lately. Even perennial winners, like Home Depotthat are not directly in the real estate sector are under pressure.
Opendoor, which is very directly involved in real estate, has been crushed. It has taken action to become more cost-efficient and changed its algorithms to become more competitive given market conditions. This has led to better performance and sales have become so low that it has not been difficult to demonstrate a recent increase.
The third quarter was mixed, with some progress, but there is still much more to work on. Opendoor reported revenue of $1.4 billion, up 41% from last year. 3,615 homes were sold in the quarter, an increase of 35%. It purchased 3,504 homes and ended the quarter with 6,288 homes and an inventory balance of $2.1 billion, up 64% year over year. Net loss improved from $106 million last year to $78 million this year.
Opendoor’s core business is buying, which means it buys, renovates and sells homes. It has a digital platform and a digital marketplace, making the process smoother and reaching millions of potential customers. But as you might imagine, it’s a capital-intensive business. When you see a revenue figure of $1.4 billion, that sounds like a lot. But that’s because each “product” can cost hundreds of thousands of dollars, if not more.
When the business is booming, the cash flow is working. Money comes in, management uses it to buy and fix houses, and then more money comes in. Due to the circumstances Opendoor has faced over the past two years, homes remain on the books for too long, hindering the process.
Things are already changing. According to Redfin Home sales rose 5% year over year in October, according to reports, while the national average 30-year mortgage rate fell 1.2 percentage points. The average sales price was still 5.2% higher.
Opendoor sees good times ahead. The company believes it has a better product that dramatically improves the buying and selling experiences, streamlining the process with fewer steps and more data. It offers several options for sellers, from selling to Opendoor to listing on the marketplace, and it has partnerships with agents and companies like Zillow.
Residential real estate represents a $1.9 trillion opportunity, but is not yet as disrupted as other sectors. The company claims to have a net promoter score of 80, much higher than the traditional listing process, and users looking for a better experience will turn to the digital platform.
Opendoor stock trades at a cheap valuation and for less than $2 per share. The market currently sees its problems much more than its opportunities.
Wall Street doesn’t expect it to become profitable in the next two years, although it does expect losses to decline. But what about in five or ten years? If Opendoor can recover, it could be an incredible stock to own. Sales are already rising, and as the real estate market improves, Opendoor is well positioned to benefit, returning to pre-high interest rate performance. It will take longer for the profitability part to fit.
That said, this is only a game for very risk-tolerant investors. And even someone with a strong risk appetite should probably take a small position.
Consider the following before purchasing shares in Opendoor Technologies:
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Jennifer Saibil has no positions in any of the stocks mentioned. The Motley Fool holds and recommends positions in Home Depot and Zillow Group. The Motley Fool recommends Opendoor Technologies and Redfin and recommends the following options: Short November 2024 $13 calls on Redfin. The Motley Fool has a disclosure policy.
In a few years, you’ll wish you had bought this undervalued stock. originally published by The Motley Fool
