Opendoor Technologies (NASDAQ:OPEN) stock has declined 65% in 2022. Although some investors still hope for the stock to make a comeback, I’d argue that now is the time time to walk away from OPEN stock.
With that said, here’s why should ignore any remaining hype and avoid Opendoor stock moving forward.
Why You Should Avoid OPEN Stock
On May 5, 2022, Opendoor Technologies released its first-quarter 2022 financial results and OPEN stock rallied the same day. However, the rally soon faded and as of June 8, 2022, shares have lost approximately 22%.
You might wonder what went wrong with the stock since the company beat on earnings-per-share and revenue. The answer is that investors were not impressed much by the financial results. Running a business is a marathon, and when you have a publicly traded company, the expectations to deliver good financial results for the management team are very high. Timing and economic conditions are important. Opendoor faces the risk of rising interest rates and inflation.
Opendoor is also facing the threat of a housing market bubble. (Or, in the best-case scenario, a softening housing market as mortgage rates have gone up and will continue to do so with upcoming Federal Reserve interest rates hikes).
In Q1 2022, OPEN announced its first quarter of positive net income. While this sounds exciting, things are a bit less glamourous if you take a closer look. The expectation for Q2 2022 revenue of $4.1 billion to $4.3 billion is lower than the revenue in Q1 2022. And that’s mostly because out of revenue of $5.15 billion, the firm generated a net profit of only $28 million. This net profit margin is small.
Furthermore, the company has already been experiencing slowing quarter-over-quarter revenue growth for the past two quarters. And Opendoor is now expecting negative revenue growth for Q2 2022. Adding more salt to the potential wound, even the high end of its expectations are lower than the $5.15 billion it managed in Q1 2022.
Investors Should Worry About OPEN Stock’s Dilution
Imagine you were an investor in Opendoor Technologies back in 2019.
The firm had then 79.98 million shares outstanding. In 2021, the shares outstanding grew to 592.57 million. Your portion of the initial investment in the business got a whole lot worse as the “pie” of shares outstanding got much bigger. Should you be happy? Of course, not.
The company has consistently increased the number of shares outstanding, and its shareholders have been diluted in the past year, with total shares outstanding growing by 8.1%.
In other words, rather than building wealth for its shareholders, Opendoor has been damaging the worth of its shares with further stock dilution. I see another huge risk: The fact that Opendoor has less than one year of cash runway. Its free cash flow trend over time is problematic and in 2021 it burned $5.81 billion.
Opendoor’s Concerning Balance Sheet
In Q1 2022, Opendoor reported it had “[i]nventory balance of 13,360 homes, representing $4.7 billion in value, up 455% versus 1Q21” and it “[p]urchased 9,020 homes, up 151% versus 1Q21.”
Having a large numbers of homes on its balance sheet is too risky now as the housing market must absorb the rising mortgage rates and the possible recession in the economy. Should home prices start to decline, the firm will face a big problem, having inventory at higher prices and being forced to sell at lower prices. This will magnify its net losses.
Investors that think the OPEN stock is a bargain should ask whether investing in a low-quality business makes sense. Opendoor Technologies is losing money, it’s burning cash and it made a marginal profit in Q1 2022, which will be put to a severe test over the next quarters. Its decision to pile up inventory is too risky at this moment. There’s simply too much risk and poor fundamentals behind Opendoor.
OPEN stock is not a great investment right now.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.