Open door technologies (NASDAQ:OPEN) has just released its Fourth Quarter Financial Statements February 24, including its 2021 annual results. The home buying business (which is now its core business) produced losses and essentially profited from the business. No wonder then that the OPEN stock crashed.
Moreover, it is likely to stay low as long as the company continues to dig itself a hole. OPEN stock peaked at $24.75 on November 1, 2021. But after the Third quarter results released on November 10 the stock started falling like a rock.
It is now at the exact level of its one-year low. This means the OPEN stock is down 67% from its November 2021 highs.
And that’s just in the space of about three months. This shows that the stock is in a massive correction. How else to interpret it?
Well, one way is to say that the market isn’t impressed with the company’s current strategy. Let’s look at this further.
How things stand at Opendoor Technologies
Let’s look at the balance sheet first. To simplify, we can say that he has $2.5 billion in cash and restricted cash as well as almost $500 million in securities and $6.1 billion in houses under assets. You can see this in the circled items I’ve shown in the asset balance sheet on the right.
But to fund that, Opendoor Technologies now has $7.2 billion in debt (up from $623 million last year), plus $2.2 billion in equity.
You can see this in the analysis of the balance sheet that I have prepared on the right. So really all the company has done this year is increase its balance sheet. But did he do it by making a profit from his house sales?
The answer is definitely “no”. This is evident from both the income statement and the cash flow statement.
For example, the company lost $191 million in the fourth quarter in net income and an adj. net loss of $80 million. But for the full year, it lost $116 million on an adjusted basis. In other words, most adj. net losses occurred in the fourth quarter.
Looking at the cash flow statement
But things are clearer in the cash flow statement. Their operating cash flow loss was $5.79 billion.
This is an increase from last year’s positive cash flow (inflows into the business) of $682 million.
You can see that in the printout and my circles in the operating cash flow portion of the 2021 cash flow statement to the right.
However, how did Opendoor finance this huge outflow of $5.8 billion (spent to buy houses)?
Well, the answer is found further down in the financing section of the cash flow statement.
It shows that the company had to take on a whole bunch of debt and pay off some of the debt. He raised $11.5 billion in debt but paid off $5.8 billion. The difference is $5.7 billion in net debt raised.
This covers the $5.8 billion spent in the operating section to purchase homes (see operating section above).
But think about it for a minute. The $5.8 billion in home purchases were covered by debt incurred — not profits. Remember, the company lost a ton of money on both a GAAP and adjusted basis.
Therefore, the main thing is that all the company has done is rely on itself. There was no net gain in buying these houses (I assume he values his houses correctly).
Bottom Line: Think Twice About OPEN Actions
There’s no benefit to leveraging your balance sheet during the height of the real estate market cycle. This strategy carries enormous risks.
For example, interest rates could skyrocket due to high inflation. Then, real estate activity will decline, driving down the value of home inventory held by Opendoor Technologies. That’s his huge risk, with the debt on his balance sheet right now.
Most value investors will think twice about OPEN stocks now. It is not clear that this is a very good strategy.
After all, its competitor, Zillow (NASDAQ:ZG) out of buy houses last quarter. They saw that was not the right strategy for them. I suspect Opendoor Technologies to be in the same situation. This is probably why the stock is down so much.
As of the date of publication, Mark R. Hake held no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.