Valued at a market cap of $1.65 billion, Opendoor Technologies (OPEN) is a penny stock that has burned massive investor wealth for shareholders. Since touching all-time highs in early 2021, OPEN stock has lost 94.5%, and set a new 52-week low of $1.58 on Aug. 12.
However, OPEN stock spiked more than 11% in a single session last Friday, as traders responded to dovish commentary from Fed Chair Jerome Powell at the central bank's annual Jackson Hole summit. Let’s see why this penny stock could surge on a Fed rate cut.
How the Fed Impacts OPEN Stock
Founded in late 2013, Opendoor is an online platform for buying and selling residential properties. Opendoor aims to disrupt the homebuying market and offers an alternative to home sellers. For example, it pays sellers upfront cash to purchase their house and then spend on home improvement before selling it to a new owner.
The COVID-19 pandemic acted as a tailwind for Opendoor, allowing the company to increase sales from $2.58 billion in 2020 to $15.56 billion by 2022. However, its performance is tied to mortgage rates, and the stock started to struggle in 2022 as the Federal Reserve started to hike interest rates rapidly to fight inflation. As the cost of debt rises, the demand for mortgage-backed loans declines due to lower household spending.
OPEN's sales fell to $6.94 billion last year, and stood at $4.5 billion in the last 12 months. In fact, Opendoor has reported seven consecutive quarters of falling revenue as it wrestles with decade-low listings amid high mortgage rates and sky-high real estate prices.
In the last two years, Opendoor has streamlined its operations by lowering its employee count and inventory levels. Now, with inflation largely under control and interest rate cuts on the horizon, Opendoor should benefit from rising home demand.
How Did Opendoor Perform in Q2 of 2024?
In Q2 of 2024, Opendoor sold 4,078 homes, generating $1.5 billion in sales, down 24% year over year. However, its focus on cost efficiencies has allowed it to report a contribution margin of 6.3% in Q2, compared to a margin of -4.6% in the year-ago period.
Opendoor’s contribution profit per home in Q2 stood at $23,000, compared to a $17,000 loss last year, allowing the company to narrow its EBITDA (earnings before interest, tax, depreciation, and amortization) loss from $168 million to $5 million in the last 12 months.
Management is focused on increasing acquisitions and ended Q2 with an inventory of 6,399 homes, up almost 100% year over year. In addition to rising home sales, Opendoor will have to improve profit margins to regain investor confidence. In the last 12 months, Opendoor has increased new home purchases by 78% to 4,771; increased inventory value by 94% to $2.2 billion; and improved gross margins by 100 basis points to 8.5%.
During the Q2 earnings call, CEO Carrie Wheeler stated, “We continue to make meaningful progress increasing brand awareness, delivering industry-leading seller NPS, expanding our product offerings, and driving structural efficiencies across our platform.”
What's Next for the Penny Stock?
In 2024, Opendoor has looked to improve pricing efficiency and enhance risk management frameworks, which resulted in narrower losses and rising gross margins. However, it remains a high-risk investment, given its negative margins and weak fundamentals.
Out of the 11 analysts covering OPEN stock, two recommend “strong buy,” seven recommend “hold,” one recommends “moderate sell,” and one recommends “strong sell,” for an overall consensus of “hold.”
The average 12-month target price for OPEN stock is $2.47, about 15% higher than Wednesday's closing price.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
