Key Points
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Investing decisions must always balance risk and reward.
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Opendoor’s new CEO aims to transform the money-losing start-up into a leader in the housing market.
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If the CEO’s plan fails to work out as planned, the company may struggle to survive.
Risk versus reward. That’s the name of the game on Wall Street. It is a significant issue to consider when examining Opendoor Technologies (NASDAQ: OPEN) as an investment today. The stock has risen roughly 240% over the past year, and yet it’s down around 80% from its all-time highs in 2021.
Is this the sign of an important turnaround for the business, or is the risk still too high for most investors to bother with?
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Image source: Getty Images.
What a difference a CEO makes
The vast majority of Opendoor’s price gain this year came after the company announced in September that it had hired a new CEO. Kaz Nejatian was brought in from Shopify at a difficult time for Opendoor. In fact, Opendoor’s stock price had declined to the point where it was a penny stock at risk of being delisted.
Just before the CEO transition, the board of directors was working on a reverse stock split to ensure the company remained listed on the stock exchange. A stock split changes nothing about the company itself; it just changes the number of shares and the percentage of the company each share represents. A reverse stock split essentially acts to increase the share price, with each share representing a larger percentage of the company. Companies usually only enact reverse stock splits when they are at risk of losing access to the capital markets.
It is very bad for a public company to lose access to capital markets. That makes it more difficult to raise money through stock and debt sales. It can be the start of a death spiral that ends in bankruptcy. It is essential to understand the severity of the situation at Opendoor when making an investment decision today.
What is Opendoor offering investors?
Opendoor has been attempting to establish an institutional-level house-flipping operation. It has not been going well, with the company operating at a loss since it went public via a merger with a special purpose acquisition company (SPAC). The losses haven’t changed since the new CEO arrived.
In fact, the company expects to continue losing money for at least another year. Investors are excited, however, because the new CEO is making big changes to the business. And the CEO has used an important buzzword on Wall Street today: artificial intelligence (AI).
Essentially, Kaz Nejatian aims to significantly reduce the company’s employee count and delegate most of the workload to AI. If that works as well as hoped, Opendoor could be a hugely profitable business, and an investment here could set investors up for life. If it turns out that flipping homes isn’t something AI excels at, the stock is likely to return to penny stock territory and be a poor investment.
To the new CEO’s credit, a series of concrete goals has been provided, with tracking yardsticks, for investors to monitor. If Opendoor is falling short of its goals, investors will be aware of it and can react accordingly. However, after such a large price increase, investors appear to be pricing in a lot of good news that has yet to materialize.
Only aggressive investors should step into Opendoor
At the end of the day, Opendoor is a story stock right now. Investors have bid the price up based on the turnaround ideas that the new CEO has floated.
It is too early for there to be any evidence of a turnaround. And if the turnaround plan doesn’t work, the planned elimination of staff would make it very difficult for the company to reverse course. In other words, if the plan fails, there’s a good chance that Opendoor could also fail.
Most investors should avoid Opendoor until there’s more evidence that the new business model is working. Only the most aggressive investors should consider this stock today, as the risk-reward balance is heavily skewed toward risk.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.