What a brutal six months it’s been for Offerpad. The stock has dropped 75.9% and now trades at $0.74, rattling many shareholders. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Offerpad, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Offerpad Will Underperform?
Even with the cheaper entry price, we're swiping left on Offerpad for now. Here are three reasons there are better opportunities than OPAD and a stock we'd rather own.
1. Decline in Homes Sold Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Offerpad, our preferred volume metric is homes sold). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Offerpad’s homes sold came in at 312 in the latest quarter, and over the last two years, averaged 34.2% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Offerpad might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.
2. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Offerpad will flip from cash-producing to cash-burning. Their consensus estimates imply its free cash flow margin of 11.6% for the last 12 months will decrease to negative 4.6%.
3. Restricted Access to Capital Increases Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Offerpad posted negative $24.07 million of EBITDA over the last 12 months, and its $93.83 million of debt exceeds the $28.17 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
We implore our readers to tread carefully because credit agencies could downgrade Offerpad if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope Offerpad can improve its profitability and remain cautious until then.
Final Judgment
Offerpad doesn’t pass our quality test. Following the recent decline, the stock trades at $0.74 per share. The market typically values companies like Offerpad based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d suggest looking at one of our top software and edge computing picks.
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