Did Opendoor's Gambit to Crush Short Sellers Backfire?

Earlier this month, Opendoor Technologies (NASDAQ: OPEN) announced an unusual plan to reward shareholders and punish short-sellers.

At the same time the company reported third-quarter earnings, it announced a unique "shareholder-first dividend" of tradable warrants, which are options issued by the company.

Management said that as of the record date on Nov. 18, shareholders would receive one warrant from each of three series for every 30 shares of Opendoor they own. Those three series have exercise prices at $9, $13, and $17, and each warrant can be converted into one share of Opendoor stock. Those warrants should begin trading after Nov. 21, the distribution date.

New CEO Kaz Nejatian saw the warrants as a way to reward shareholders, as the stock was essentially resurrected from the dead earlier this year after a meme stock rally in Opendoor gained momentum, lifting shares from a bottom of $0.51 to more than $10 at one point. The movement also led to real change in the company, as former CEO Carrie Wheeler was ousted, replaced by Nejatian, the former COO of Shopify, and co-founders Eric Wu and Keith Rabois returned to the board of directors, with Rabois taking over as chair.

However, Nejatian also saw them as a way to punish short-sellers who have bet against the stock as Opendoor has become a battleground stock since the meme rally emerged, saying on the earnings call, "I'll admit it, it gives me just a bit of joy that this will totally ruin the night of a few short-sellers."

Image source: Opendoor.

What happened next

You'd expect an announcement like that to fuel a rally in the stock, especially as Opendoor has shown how volatile it can be, and the warrant could significantly accelerate investor return if the stock jumps.

Indeed, Opendoor shares did climb initially. Over the four sessions that followed the news, Opendoor stock jumped 43% on high volume, with trading volume reaching 250 million on Nov. 12, the day the stock peaked.

Since then, the stock has given up all of those gains, though that pullback has come at the same time that the broad market has sold off on concerns about an AI bubble.

While the warrants could still help propel the stock higher as owners of the warrants have an incentive to do so, it seems whatever rush might have materialized after the announcement and before the record date was not enough to deliver lasting gains to the stock.

Where Opendoor goes from here

The warrants weren't the only major announcement to come out of Nejatian's first earnings call. He also introduced a new turnaround strategy with primary objectives: scaling acquisitions, improving unit economics and resale velocity, and building operating leverage.

Nejatian announced a bold goal as well, saying the company would reach breakeven adjusted net income on a go-forward basis by the end of 2026.

The business has not been profitable, even with adjustments, since the pandemic, and its business model, which relies on selling homes for more than it buys them for and collecting service fees, still seems unproven.

Nejatian's strategy makes sense, but Opendoor has another problem. The business is closely connected to the broader housing market, and it's struggled while the housing market has been in a slump. Despite falling interest rates, activity in the housing market has yet to rebound, and Home Depot management noted that homeowners were cautious about spending in the current macroeconomic environment.

Opendoor's third-quarter results were disappointing, and the company also gave weak guidance for the fourth quarter, though Nejatian observed that the company is still locked into decisions that were made by the previous management team, indicating his team should be judged on next year's performance, as that's when the real turnaround would start.

Still, given the weakness in the economy, there are no signs that a recovery in the housing market is around the corner. For Opendoor, any recovery is not going to be easy, especially in the current macro climate.

Jeremy Bowman has positions in Home Depot and Shopify. The Motley Fool has positions in and recommends Home Depot and Shopify. The Motley Fool has a disclosure policy.