Opendoor Technologies Roars Back to Life. Is A Bigger Rally Next?

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Opendoor Technologies (NASDAQ:OPEN) stock rose more than 13% on Friday, closing at $7.97 per share. The gain came ahead of expected interest rate cuts this week and marked the company's first meaningful increase in a month. It ended a decline that began after shares reached $10.87 per share in mid-September.

That earlier peak resulted from meme stock activity, with retail traders pushing the price higher on momentum rather than company results. The excitement did not last. By late September, OPEN had given back most of those gains, even after a 16% jump on the 25th following positive housing data. The stock then continued lower as market sentiment cooled.

Breaking the Downtrend

The drop was part of a larger pattern. Meme rallies, such as the one that lifted OPEN from summer lows near $0.50 per share, tend to reverse quickly. Investors moved money to other names, including Better Home & Finance (NASDAQ:BETR), which gained attention after a hedge fund manager called it "the Shopify of mortgages." OPEN fell 12% in one day during that shift.

The company's announcement of a national expansion for its iBuying program -- using cash offers and agent partnerships -- also failed to hold the price above $8. Doubts about scaling up in a slower market weighed on the shares.

Friday's advance was somewhat different, though. Trading volume exceeded 200 million shares, indicating participation from retail and institutional investors. Recent housing figures showed modest improvement, with pending sales edging higher. The main driver, though, appears tied to monetary policy.

Federal Reserve Rate Outlook

The Federal Open Market Committee meets this week and is expected to lower the federal funds rate by 25 basis points on Wednesday, setting a new range of 3.75% to 4%. This would be the second cut in a row, following September's move. Market pricing suggests two additional quarter-point reductions before the end of the year, and point to a steady path lower.

Lower rates obviously affect housing directly. The average 30-year fixed mortgage rate is near 6.5% and could fall to 6% or below. For a $400,000 loan, that drops the monthly payment from $2,528 to $2,398, saving about $1,600 per year. Such savings can encourage more buyers to enter the market.

Many homeowners remain in loans with rates under 4% from the pandemic period, reducing available inventory. Easier rates may prompt some to sell, adding to the national supply. Annual existing-home sales have been below 4 million, suggesting a pickup in demand could push the figure toward 4.5 million.

Story Continues

Opendoor would benefit from the higher activity. The company buys homes for cash, makes repairs if needed, and resells them. Increased transactions speed up turnover and improve margins. Its pricing algorithms perform better in active markets, which could help third-quarter results after its Q2 report disappointed investors. Lower rates will also reduce carrying costs on the $1.5 billion in homes it holds.

Challenges Ahead

The business model, however, carries risks. Opendoor purchases properties outright, leaving it open to shifts in home values and unexpected repair expenses. Pricing errors in fast-moving markets can force discounted sales. Zillow (NASDAQ:Z) ended its iBuying effort after losses of $500 million.

OPEN recorded anadjusted profit in the second quarter for the first time in years, but third-quarter estimates show losses of $20 million to $30 million. Gross margins are around 8%, and net debt stands at nearly $2 billion, limiting flexibility if conditions worsen.

Recent sales by insiders, including 11 million shares from Access Industries for $95 million, raise analyst eyebrows. Short interest is also above 20%, which can fuel rapid moves in either direction. The stock's meme characteristics amplify OPEN's volatility as gains from hype often reverse when investor attention shifts elsewhere -- as it inevitably does.

Home prices have risen 65% since 2015 while wages have not kept pace, shrinking the buyer pool. Competitors like Redfin offer similar services at lower cost.

As the first major move higher for OPEN stock in a month, does this represent the start of a new round of buying by the market that could catapult it even higher?

Key Takeaway

The recent gain may draw interest from those looking for rate-driven gains, but the company's financial position calls for caution. Shares remain 25% below the September high, and losses continue.

With ongoing losses, high debt, and a housing market unlikely to rebound sharply, betting on much higher prices is a risky gamble. OPEN hasn't traded on its fundamentals, and despite the stock offering seemingly discounted valuations, I'd prefer to sit on the sidelines until after next week's earnings report, which should provide clues on whether the real estate stock's efforts are gaining any traction.

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