3 Reasons to Sell OPEN and 1 Stock to Buy Instead

Opendoor has been on fire lately. In the past six months alone, the company’s stock price has rocketed 231%, reaching $4.43 per share. This run-up might have investors contemplating their next move.

Is now the time to buy Opendoor, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Opendoor Will Underperform?

We’re glad investors have benefited from the price increase, but we're swiping left on Opendoor for now. Here are three reasons there are better opportunities than OPEN 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 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 4,299 in the latest quarter, and over the last two years, averaged 21.1% 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. Cash Burn Ignites Concerns

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

While Opendoor posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, Opendoor’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 8.8%, meaning it lit $8.85 of cash on fire for every $100 in revenue.

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 $94 million of EBITDA over the last 12 months, and its $2.18 billion of debt exceeds the $789 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. Following the recent rally, the stock trades at $4.43 per share (or a forward price-to-sales ratio of 0.9×). The market typically values companies like Opendoor 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 the Amazon and PayPal of Latin America.

Stocks We Like More Than Opendoor

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