3 Reasons Why Investors Should Avoid Opendoor (OPEN)

Once the unintuitive winner of the post-pandemic new normal, Opendoor (OPEN) saw its share price average nearly $35 a pop at the peak of its power. When the COVID-19 crisis first capsized society, many folks understandably feared the worst. After all, you don’t just shut down the biggest economy in the world without major consequences. Yet OPEN stock soared following its reverse merger announcement, skyrocketing throughout much of February 2021.

Unfortunately for committed stakeholders, Opendoor – which specializes in the iBuyer business model of leveraging advanced technologies to facilitate lightning-fast offers for residential real estate – soon began an ugly descent. Temporarily, the bulls managed to reverse downward momentum in late summer of last year, with the housing market experiencing a surge in demand. But as the Federal Reserve stepped in to reverse prior monetary policy excesses, OPEN stock lost its wings.

On a year-to-date basis through the conclusion of the Nov. 3 session, OPEN stock gave up more than 84% of equity value. What’s more, investors have every reason to question the underlying fundamentals or lack thereof. Just recently, Opendoor announced layoffs that would impact 18% of its workforce. Though shares popped higher on the disclosure – perhaps based on the assumption of reduced overhead improving the bottom line – it’s time for people to recognize reality.

More than likely, in my opinion, OPEN stock will continue to erode unless the fundamental nature of housing changes – and right quick. Other than that scenario, here are three reasons why caution should be the guiding star.

OPEN Stock Can't Have Its Cake and Eat It Too

Primarily, investors need to be cautious about OPEN stock because of a very simple concept that no one should overthink. You can have higher interest rates or higher housing prices, but you can’t have both at the same time.

Now, expressing this sentiment sometimes generates defensive opinions. Peruse various public forums and you’ll eventually come across arguments that because present homebuyers are sitting on mortgages with record-low interest rates, little incentive exists for them to reduce their sales price. Instead, they’ll simply un-list their homes and wait for a better environment.

However, this line of thinking assumes home sales occur in a vacuum. In reality, people sell homes for a multitude of reasons, including new opportunities along with negative dynamics such as layoffs. Indeed, part of the danger of raising interest rates too aggressively is that it can yield recessions. Therefore, homeowners may be forced to sell in ecosystems unfavorable to them.

Moreover, the reduction of home sales prices represents a matter of necessity, not of emotions or ego. Simply put, as rates move up, the number of qualified homebuyers (who intend to finance) goes down. Therefore, inflexibility among prospective home sellers necessarily reduces their total addressable market.

For OPEN stock, it means the underlying company can’t have its cake and eat it too. In other words, Opendoor can’t cherry pick the best elements of inflation (higher demand) and deflation (lower prices). It must operate within the defined paradigm.

Opendoor's iBuyer Model is Flawed

Perhaps a controversial thesis, it’s quite possible that Opendoor’s iBuyer business model is flawed. Certainly, under an ecosystem of frequently rising interest rates, the iBuyer platform sheds relevance.

As a Wired.com article pointed out, the way Opendoor’s business works is that it leverages technologies such as artificial intelligence to spit out a quick cash offer to interested home sellers. Owners get to unload their property quickly while Opendoor receives the benefit of transacting said property at a lower-than-market price. From there, the company flips the home, pocketing the profits.

Of course, under a deflationary environment where housing prices are falling, this narrative doesn’t work out so well. Moreover, fewer people will be willing to part with their homes at a price lower than what a traditional brokerage firm can fetch. And here is where the critical flaw comes into play.

Essentially, Opendoor isn’t selling a technology. Rather, it’s selling convenience: it offers a lower price in exchange for a quick transaction. Indeed, one doesn’t really need technology to facilitate such a business model of buying low and selling high. It happens all the time across virtually every economic sector.

Plus, at the present juncture, people want maximum dollars for their homes. Therefore, more people will likely wait for a better deal than to enjoy the convenience of a quick transaction.

Layoffs Are Only a Temporary Fix

Finally, it’s worth pointing out that layoffs only represent a bandage, a temporary fix while buying time for a better, more comprehensive solution. The layoffs cannot be the solution. Otherwise, it’s only delaying the inevitable.

As The Wharton School of the University of Pennsylvania professor Peter Cappelli stated, “firms that are laying off are almost by definition in trouble.”

“The research evidence has not found any support for the overall idea that layoffs help firm performance. There is more support for the idea that where there is overcapacity, such as a market downturn, layoffs help firms. There is no evidence that cutting to improve profitability helps beyond the immediate, short-term accounting bump,” Cappelli added.

To be fair, a reduction in overhead may allow Opendoor to align itself with the current market realities of real estate. Still, such an alignment wouldn’t address the bigger issues impacting OPEN stock, especially the vulnerabilities of an iBuyer model during a deflationary cycle. Therefore, investors should probably stay on the sidelines until the sector provides clarity.

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