In the Not-Too-Distant Future, You'll Regret Not Investing in This Underappreciated Share
The real estate market has been sluggish due to high interest rates for a few years now, making it tough for many aspiring homeowners to secure a mortgage and pushing up the overall house price. However, with interest rates dropping and people growing weary of waiting, changes are already occurring. This is an excellent time to invest in real estate and associated stocks, many of which are still below their previous highs.
The tech-driven buying and selling platform Opendoor Technologies (OPEN 2.36%) has been experiencing sales declines and losses, with its stock plummeting 96% from its all-time highs. its current price-to-sales ratio of 0.2 reflects the market's current view of the company. However, in five years, it might appear quite different, and you could regret not taking advantage of this low price.
Real estate market challenges
Interest rates significantly impacted the real estate market, causing numerous businesses to struggle. Even well-established companies, such as Home Depot, have faced pressure.
Opendoor, a company deeply involved in real estate, has been battered. To survive the market conditions, it has taken steps to reduce costs and adjusted its algorithms to become more competitive. This strategy has led to improved performance, with sales reaching a point where demonstrating increases became more manageable.
The third quarter reported mixed results, with some progress but much improvement needed. Opendoor reported $1.4 billion in revenue, a 41% increase from last year. It sold 3,615 homes in the quarter, a 35% increase. It acquired 3,504 homes and ended the quarter with 6,288 homes and an inventory balance of $2.1 billion, a 64% jump year over year. Net loss, while reduced from $106 million last year to $78 million this year, remains a concern.
Opendoor's core business involves buying, renovating, and selling homes. This digital platform and marketplace streamline the process, reaching millions of potential customers. However, it's a capital-intensive venture. While $1.4 billion in revenue sounds impressive, the high costs per "product" (usually hundreds of thousands of dollars) means cash flow can be challenging under trying market conditions.
Huge potential under improved conditions
Conditions are already improving. According to Redfin reports, home sales rose 5% year over year in October, accompanied by a 1.2 percentage point decrease in the national average 30-year fixed mortgage rate. The median selling price increased by 5.2%.
Opendoor anticipates better times ahead. It believes it offers a superior product, revolutionizing the homebuying and selling experiences by reducing steps and providing more data. Its various options for sellers, including selling to Opendoor or listing on its marketplace, together with partnerships with agents and companies like Zillow, make it an attractive choice for users seeking a more satisfactory experience.
Residential real estate represents a $1.9 trillion opportunity, but disruption has been slower than in other industries. Opendoor claims a net promoter score of 80, far above the traditional listing process, and growing numbers of users seeking better experiences will gravitate toward its digital platform.
A stock for bold investors
Opendoor trades at a low valuation and under $2 per share. The market currently focuses more on the company's struggles than its potential. Wall Street expects the company to remain unprofitable over the next two years, although losses should narrow. However, in five or ten years, if Opendoor recovers, it could become an outstanding investment. Sales are already increasing, and as the real estate market improves, Opendoor should regain its pre-high-interest-rate performance. Profitability will take longer to achieve.
In conclusion, this opportunity is best suited for high-risk investors. Even those with a strong risk appetite should consider a small investment.
In light of the improving real estate market, investing in real estate and associated stocks, such as Opendoor Technologies, could prove lucrative in the future. Despite its current challenges and low stock price, Opendoor's potential to disrupt the residential real estate market and provide a superior user experience makes it an appealing option for bold investors seeking high returns.
As interest rates drop and the overall real estate market recovers, companies like Opendoor could regain their pre-high-interest-rate performance, transforming a once challenging investment into a significant financial opportunity.
