What a brutal six months it’s been for Opendoor. The stock has dropped 30.1% and now trades at $4.49, rattling many shareholders. This might have investors contemplating their next move.
Is there a buying opportunity in Opendoor, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Opendoor Will Underperform?
Even with the cheaper entry price, we’re sitting this one out for now. Here are three reasons you should be careful with OPEN, plus one 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 Opendoor, our preferred volume metric is homes sold). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Opendoor’s homes sold came in at 1,921 in the latest quarter, and over the last two years, averaged 12.2% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Opendoor might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
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.
Opendoor has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 3.9%, below what we’d expect for a consumer discretionary business.
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.
Opendoor posted negative $84 million of EBITDA over the last 12 months, and its $1.34 billion of debt exceeds the $999 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 Opendoor 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 Opendoor can improve its profitability and remain cautious until then.
Final Judgment
Opendoor doesn’t pass our quality test. After the recent drawdown, the stock trades at 155.8× forward EV-to-EBITDA (or $4.49 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at the Amazon and PayPal of Latin America.
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