The shares of Opendoor Technologies (NASDAQ:OPEN) have trended lower since they began trading on Dec. 18. That sets the stock apart from many companies that have recently gone public, a large number of which have soared after going public. However, I think investors may be right about Opendoor stock.
I don’t expect the company to be a bust. Actually, I think Opendoor may be going public at the right time. According to the company’s website, “Every month we buy hundreds of homes helping homeowners across the country get to their next chapter.” The company specializes in buying homes online.
In a post-pandemic world, portability will be the name of the game. Further, the magnitude of urban flight due to Covid-19 may be exaggerated, and there is some evidence that many of those fleeing cities are moving to other urban areas.
All of those points should help Opendoor. The company operates in about 20 metropolitan markets nationwide, and it will be looking to expand.
The problem that I foresee is that Opendoor’s market opportunity may not be as large as it thinks. That, however, could change.
The Experience Generations
My generation was probably the last that was encouraged to “plant roots.” Yet even as I get older, I’m balancing the desire for routine with the freedom of portability. I have to admit that the latter wins most of the time.
My children, who are in the millennial/Generation Z generations, will likely have more transient lives than I have had. And as InvestorPlace columnist Luke Lango correctly noted, the process of selling a home needs to be updated.
So in the current environment, the demand for Opendoor’s service may actually be rather low. And, as I’ll explain below, the company has placed an important restriction on its service.
Tough Competition and an Important Restriction
One of the challenges that Opendoor faces is that it operates in a sector that is filled with competition. InvestorPlace contributor Vince Martin points out that, despite Opendoor’s current lead in the online real estate market, competitors such as Zillow (NASDAQ:Z) and Redfin (NASDAQ:RDFN) are in the space along with other startups.
But I believe the larger issue for Opendoor is its addressable market. Currently Opendoor will “only buy homes if the seller has clear ownership of the property.” That means the owner has to be done with making mortgage payments. And that’s where the story gets a little less attractive for Opendoor.
According to a 2017 study by Zillow, the majority of homeowners who own their homes outright are at least 70 years old. According to that same study, just 15.9% of millennials own homes and have no mortgages.
That obviously limits the size of Opendoor’s addressable market. On the one hand, millennials and the members of Generation Z are likely to make up the largest percentage of those buying homes. However, these generations have high unemployment levels, and many of those individuals remain deeply in debt.
So Opendoor at this point has a fairly small market, and it’s facing tough competition.
Opendoor Stock Is a Cautious Buy
Lango suggests that Opendoor could be as disruptive as Amazon (NASDAQ:AMZN).
But Opendoor will only buy a relatively small percentage of homes, and it’s not available in all areas of the country at this time. Amazon never faced neither of those hurdles.
But going public could help the company expand its reach and breadth of its offerings. Investors should, however, realize that Opendoor stock is still a speculative stock that’s in its infancy. A small position in the name is justified. But let the company prove itself to you before taking a large position in it.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.