Opendoor Technologies Inc. (OPEN)
Bagholder
We do not like companies whose whole bull case is “we’ll change our business model! We promise!”
Opendoor Technologies (OPEN) buys and flips houses for a profit but makes no profit. Historically, the company has lost buckets of money. After the company’s recent share-price rise, valuation implies a belief it will be different this time. We don’t think so.
If a company consistently loses money, value is destroyed, and its shares should trade at a discount to book value. OPEN has consistently impaired value and has little prospect of adding any value, even with its new strategy, yet OPEN shares trade at a premium of some four times its book value, based on an untested business model in a housing market that is mediocre at best. Whatever promoters are selling, we are not buying.
The bull case for OPEN is called “Opendoor 2.0,” a platform-based approach that aims to rid itself of the old growth-at-any-cost strategy, rely less on price predictions, reduce inventory holding periods, improve AI usage to assess potential transactions, and enhance facilitation of third-party transactions. The underlying principle has not changed: resell houses at a profit from inventory bought at low-balled purchase prices. The company’s primary asset is housing inventory that it intends to sell in a short period of time.
The updated strategy immediately exposes itself to elephants in the room.
To sell housing inventory faster in a slow-moving market, particularly on a large scale, the company risks lower selling prices to quickly attract more buyers in volume. A lower selling price likely means less gross profit compared to the historic strategy of holding inventory for longer periods when the seller is holding out for a better price. Cost savings from shorter holding periods are likely to be very small. Transaction volumes need to increase to offset a potential gross margin hit, increasing capital intensity and interest expenses. The company has to walk and chew gum at the same time to achieve added value, something it has failed to do in the past.
The current housing market is slow moving, with stagnant prices. House flippers generally make more money when prices quickly rise and lose more money when house prices fall. In OPEN’s case, the company loses money even when house prices are stagnant, because OPEN carries the additional cost burdens of sales and marketing, general and administration - especially stock compensation, technology, as well as the usual interest expenses.
As for jumping on the AI bandwagon, OPEN’s software and computer assets are minimal. There has been decreasing spend on technology and no evidence this technology and the data that it analyzes have led to group profitability, let alone proof that it will work going forward in a mediocre housing market.
Included in OPEN’s additional expenses outside the cost of inventory is an unusually large stock compensation expense that defies justification, given the company’s poor operational performance. The expense offsets much of the efficiency gains the company claims to make elsewhere.