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Opendoor’s (NASDAQ:OPEN) post-earnings stock price movements continue to baffle my mind. On 5th May 2022, Opendoor reported a surprise net profit in its Q1 earnings, indicating an inflection point in the business and proving that the iBuying model can work. Going into earnings, Opendoor’s stock was very much depressed (~$7.2 per share), and a quick 15-20% bounce in the after-hours session made sense. However, the stock fell by ~20% in the opening 20 mins of Friday’s session to trade as low as ~$6.25 per share. In subsequent sessions, the stock dropped to new all-time lows of $5.15 before bouncing back to $7.5 per share. The stock currently sits at $6.85 per share (right where it was post-earnings report).
This whiplash action in the stock indicates confusion among investors; however, I am unable to find any valid fundamental reason for this bearish activity (and believe me, I have been looking for it like a hawk). In my view, the stock price action is not earnings-driven, and I continue to believe that the stock is detached from business fundamentals, i.e., it is completely mispriced.
Today, we will study Opendoor’s Q1 earnings report and review some of management’s commentary from the earnings call. After yet another fantastic quarter, I am upgrading Opendoor’s fair value and ten-year price target.
Analyzing Opendoor’s Q1 2022 Earnings Report
In Q1 2022, Opendoor’s revenue came in well ahead of guidance at $5.2B (up 590% y/y, beating expectations by ~24%) on home sales of 12.7K (up 415% y/y). Despite a surge in mortgage rates, housing demand remained strong, which led to greater than expected home sales in Q1. Interestingly, Opendoor purchased ~9K homes last quarter, shrinking its inventory by ~3.6K homes. My understanding is that buyers rushed to complete deals in Q1 (to get in before mortgage rates rise further), and as you may know, home supply remains at record lows. These factors pushed up HPA (home price appreciation) and led to stronger-than-expected gross margins of 10.4%.
While the housing market is still a sellers’ market, Opendoor’s AI/ML-based pricing models are probably seeing a slowdown in future HPA, and hence, the inventory shrinkage. Opendoor’s management mentioned Q1 inventory levels as the low point of this year; however, that may be due to geographic expansion into some massive markets – San Francisco Bay Area, New York, New Jersey, Detroit, and Southwest Florida.
The most noteworthy aspect of Opendoor’s earnings report was the positive GAAP …….