A Few Years From Now, You'll Wish You'd Bought This Undervalued Stock

The housing market has been sluggish for a few years now. High interest rates make it harder for many wannabe homeowners to get a mortgage, and they also raise the total price a buyer pays for a house.

However, with interest rates coming down and people tired of waiting, there's already change taking place. That means now is the time to make your move on real estate and related stocks, many of which are still well below previous highs.

Buyer and real estate platform Opendoor Technologies (NASDAQ: OPEN) has been dealing with sales declines and losses, and its stock is down 96% from its all-time highs. It trades at a dirt cheap price-to-sales ratio of 0.2, which is a reflection of how the market views it today.

But in five years from now, it could look a lot different, and you might regret not grabbing it at this price.

A tough real estate market

Interest rates strongly affected the real estate market, so it's no surprise that many of them have been struggling lately. Even perennial winners, like Home Depot, which isn't directly in real estate, have been experiencing pressure.

Opendoor, which is very much directly in real estate, has been crushed. It has taken action to become more cost-efficient and changed its algorithms to become more competitive given the market conditions. This has led to better performance, and sales got so low that it wasn't as hard to demonstrate increases recently in comparison.

The third quarter was mixed, with some progress, but plenty more to work on. Opendoor reported $1.4 billion in revenue, 41% higher than last year. It sold 3,615 homes in the quarter, a 35% increase. It purchased 3,504 homes and closed the quarter with 6,288 homes and an inventory balance of $2.1 billion, up 64% year over year. Net loss improved from $106 million last year to $78 million this year.

Opendoor's core business is buying, which means it buys, renovates, and sells homes. It has a digital platform and marketplace, making the process smoother and reaching millions of potential customers. But as you might imagine, it's a capital-intensive business. When you see a figure like $1.4 billion in revenue, it sounds like a lot. But that's because every "product" can cost hundreds of thousands of dollars, if not more.

When the business is thriving, the cash flow works. Money comes in, management uses it to buy and fix up homes, and then more money comes in. With the conditions Opendoor's been dealing with for the past two years, houses are sitting on its books for too long, thwarting the process.

Massive opportunities under better conditions

Things are already changing. According to Redfin reports, home sales increased 5% year over year in October as the national average 30-year fixed mortgage rate fell by 1.2 percentage points. The median selling price was still up 5.2%.

Opendoor sees good times ahead. It believes it has a better product that drastically improves the homebuying and selling experiences, streamlining the process with fewer steps and more data. It offers various options for sellers, from selling to Opendoor to listing on its marketplace, and it has partnerships with agents and companies like Zillow.

Residential real estate is a $1.9 trillion opportunity, but it hasn't yet been disrupted to the degree that other industries have. The company claims to have a net promoter score of 80, much higher than the traditional listing process, and users looking for a better experience are going to move toward its digital platform.

Not a stock for the faint of heart

Opendoor stock trades at a cheap valuation and at under $2 per share. The market sees its struggles right now much more than its opportunities.

Wall Street doesn't see it becoming profitable over the next two years, although it expects losses to narrow. But what about in five or 10 years? If Opendoor can recover, it could be an incredible stock to own. Sales are already on the rise, and as the real estate market improves, Opendoor is well-positioned to benefit, going back to its pre-high-interest-rate performance. The profitability piece will take longer to fit in.

That said, this is only a play for highly risk-tolerant investors. And even someone with a strong appetite for risk should probably take a small position.

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*Stock Advisor returns as of November 18, 2024

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot and Zillow Group. The Motley Fool recommends Opendoor Technologies and Redfin and recommends the following options: short November 2024 $13 calls on Redfin. The Motley Fool has a disclosure policy.