Opendoor Is Down 53% So Far in 2024. Is It a Buy Before the Fed Starts Cutting Rates?

Opendoor (OPEN -1.87%) is down by 53% so far in 2024, and what makes this even more interesting is that most real estate technology stocks, such as Zillow and Redfin, are performing far better. What's more, Opendoor recently reported second-quarter results that surpassed even the high end of management's expectations. So with the Federal Reserve set to start lowering interest rates, and a general sense of optimism that the housing market is about to pick up steam, is now a great time to buy Opendoor while it's so beaten down? Opendoor's strong second-quarter numbers Despite a persistently sluggish real estate market, Opendoor delivered impressive results in the second quarter. The company bought 4,771 homes, up 78% year over year and significantly higher than its guidance called for. It sold 4,078 homes, so it built its inventory a bit. Furthermore, contribution margin, a profitability metric that takes into account the costs of holding a home on the balance sheet, came in at 6.3%, well above the 5.4% to 5.7% range the company had guided for. On an adjusted EBITDA basis, Opendoor lost $5 million for the quarter, far better than the expected loss of $30 million at the midpoint of guidance. It wasn't just about the strong numbers At first glance, these numbers might seem very strong. And they were. But the most significant part of the second-quarter earnings report wasn't what happened in the second quarter. It's what is expected in the future. In its letter to shareholders, Opendoor's management said the company saw unexpected price softness in June, and that the company had increased home-level price drops in response, to meet sales goals. In a nutshell, Opendoor expects the third quarter to be significantly weaker than many had expected, and the guidance seems as if the company is taking a step backward in the middle of what should be a seasonally active quarter for home sales. Revenue guidance of $1.25 billion at the midpoint would represent a roughly 17% sequential decline. More significantly, contribution margin is expected to fall from an acceptable 6.5% to an abysmal 2.9% to 3.5%. As a result, the adjusted EBITDA loss is expected to widen to $60 million to $70 million, a big jump from this past quarter's $5 million loss. The bottom line To be fair, Opendoor's management specifically pointed out that its third-quarter guidance was based on current information. And while the third quarter may indeed be a step backward, regardless of what the Fed does or says -- after all, we're already two months into it -- it's entirely possible that falling interest rates could be a tailwind for Opendoor. Plus, with about $1.2 billion in capital, including about $800 million in cash, Opendoor certainly has the flexibility to get through a rough quarter or two. However, the business could struggle to show investors a true path to profitability unless rates fall by a significant amount and volume picks up sharply. Even then, it could be an uphill battle. Management is certainly doing a good job making the best of a terrible real estate environment, but before investing I would need to see a clearer path to profitability, and more importantly, more stability in the numbers in a slower-than-expected market than the third-quarter guidance indicates.