To The Moon

US stocks recovered from earlier losses last Friday, battling back from Wall Street's steepest sell-off in over a month as investors await more economic data in the coming days ahead of the Federal Reserve's next rate decision in December.

The best-performing concepts is SPACs. Considering the different perceptions of the stock, this time TigerPicks chose $Opendoor Technologies Inc(OPEN)$ to have a fundamental highlight to help users understand it better.

In the past five days, $Opendoor Technologies Inc(OPEN)$ 's share price has risen by 23.78%.

$Opendoor Technologies Inc(OPEN)$

Opendoor Technologies Inc. is an e-commerce platform for residential real estate transactions. By leveraging software, data science, product design and operations, the Company is engaged in building a technology platform for residential real estate that offers buyers and sellers a digital, on-demand experience.

Last week, the company reported Q3 earnings. Mr. Market was disappointed with the earnings print and sent the stock crashing following the earnings announcement. Also as expected, this new strategy, dubbed Opendoor 2.0, will focus on "refounding" the company as a software and AI company. The AI buzzword failed to ignite a market rally following the announcement probably because many investors were expecting this pivot.

The adoption of AI is expected to play a key role in this transition. I wanted to delve deeper into this strategy to determine whether Opendoor could actually decouple itself from the macroeconomy, which obviously warrants a valuation re-rating.

After evaluating the new strategic framework underlying Opendoor 2.0's strategy, I remain bearish on the prospects for OPEN stock.

Opendoor Is Already Integrating AI Into Its Operations

Based on Q3 filings, the company is integrating AI to achieve 2 key objectives for now.

1. To improve the operational efficiency.

2. To provide a better experience to customers using new AI products.

On the Q3 earnings call, the management highlighted several ways in which AI has already improved the operational efficiency of its business operations.

1. Opendoor is using automated underwriting supported by AI to reduce the headcount assigned to certain business flows from 11 to just 1.

2. The company is automating the home assessment process as well. After integrating AI, the assessment time for a home has reduced from a full working day to approximately 10 minutes.

3. The manual data entry process is being completely eliminated.

4. AI is being integrated into several other business processes as well, including inventory management.

5. AI-driven home inspections, AI-enabled home scoping, and AI-powered Escrow solutions are also being rolled out by the company to slash operating costs while improving efficiency.

On the new products front, Opendoor has launched 3 AI-enabled products/services to improve the purchasing experience of homebuyers.

1. Opendoor Key App which helps homeowners to do a property assessment on their own without paying for the expertise of an evaluator.

2. AI-powered multilingual agents.

3. Opendoor Checkout which allows homebuyers to complete the first steps of purchasing a home, including sending out an offer, 100% online.

The Decoupling Story Does Not Capture The Full Truth

To understand this better, let's look at Opendoor's current business model.

Opendoor's business model

The company not only earns revenue through fees but also books profits by selling homes. This is because Opendoor purchases homes and holds them to benefit from a potential home price appreciation. Opendoor's recent struggles actually stem from the weakness in the housing market as the company's net income is closely tied to home price appreciation because of this business model.

The new model, dubbed Opendoor 2.0, is a step forward in the company's mission to establish a capital-light business model. With this new model, Opendoor will focus on reaching profitability by growing its service fees from arranged transactions rather than profiting from home price appreciation.

With a long-term view, I believe this is the right strategy. Opendoor is unlikely to see any meaningful expansion in its valuation multiples in the long run as long as it acts as an asset manager that exposes investors to the risk of changing house prices. By focusing on growing its transaction volumes while reducing the number of days a property is held on its balance sheet, Opendoor should be able to mitigate the gap risk that arises from holding a property for too long anticipating price appreciation.

However, the problem is that Opendoor will be dependent on housing market dynamics one way or the other. The current macro environment is not supportive of transaction volume growth as much as it is not supportive of home price appreciation. The fundamental challenges faced by the industry remain the same.

Housing affordability in the U.S. has dramatically declined since 2021

Opendoor's pivot most certainly seems like the right choice for the company and its long-term shareholders. However, this strategic pivot is unlikely to deliver any meaningful outcomes (if at all) in the foreseeable future. Up more than 4x this year, OPEN stock does not seem to reflect this unpleasant reality, in my opinion.

The Seemingly Cheap P/S Ratio Is Deceptive

At a market valuation of ~$6 billion, Opendoor is currently valued at a P/S multiple of just over 1.2x. This makes the company cheaply valued compared to some of its peers as illustrated below.

P/S multiple comparison between Opendoor and its peers

The seemingly cheap valuation, however, masks a few fundamental differences in the business models of Opendoor and these peers. Opendoor's relatively low P/S multiple, therefore, makes a lot of sense given that the company is unlikely to transition into a profitable real estate marketplace in the foreseeable future.

In addition, despite all the chatter about transitioning to a capital-light business that does not rely on the macro environment, Opendoor's transition has just begun, so the company has not made any progress on this front just yet. As a result, almost all the company's revenue is currently tied to the macro environment, which, as I discussed earlier in this analysis, is a massive red flag as the housing market cannot be expected to recover in the next few quarters.

After taking all of these into consideration, I believe Opendoor's relatively low valuation level compared to its peers is justifiable.

Takeaway

We are likely to see meaningful efficiency gains in the long run as a result of this AI integration. As part of a push to establish a capital-light business model, Opendoor 2.0 will focus on transitioning the company into a tech business.

However, as discussed in this analysis, Opendoor's prospects will continue to remain strongly tied to the health of the U.S. housing market. The key earnings growth driver will no longer be house price appreciation once this transition is fully executed but rather transaction growth.

I remain bearish on the prospects for OPEN stock although I welcome this strategic shift as I believe a lot could still go wrong for the company before any of these strategies deliver a quantifiable impact on earnings.

Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts.

Based on 6 Wall Street analysts offering 12 month price targets for Opendoor Technologies in the last 3 months. The average price target is $3.76 with a high forecast of $8.00 and a low forecast of $1.40. The average price target represents a -53.69% change from the last price of $8.12.

Resource:

https://seekingalpha.com/article/4842321-opendoor-stock-housing-market-decoupling-does-not-capture-full-truth

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