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Digital residential real estate website Open door (NASDAQ:OPEN) still looks like good value, despite the huge gains the OPEN share has made recently.

Source: PREMIO STOCK / Shutterstock.com

As I wrote in my September 28 post, Opendoor’s strong second quarter earnings combined with its huge buying program and rising house prices mean higher profits.

OPEN stock has risen 67% in the past two months, from $ 14.47 on August 18 to $ 24.10 on October 19. However, since the start of the year (YTD), the stock has only risen 6.17% from $ 22.70 at the end of December. 31.

I think these gains will continue. Indeed, the OPEN share could increase considerably with higher expected profits.

Where are things with Opendoor?

Opendoor’s second-quarter revenue increased 59% from the first quarter to $ 1.2 billion, with 41% more homes sold than in the previous quarter. In addition, his adj. net income turned positive at $ 2.5 million, down from $ 21 million in the prior quarter.

In addition, its earnings EBITDA (earnings before interest, taxes, depreciation and amortization) also turned positive at $ 26 million. This is also up from a negative $ 2 million in the previous quarter.

At the end of the second quarter, Opendoor had a sizable $ 2.7 billion home equity balance it had acquired. In addition, he had contracts to acquire $ 3 billion in additional housing.

Valuing OPEN stock

Suppose this $ 5.7 billion housing balance appreciates 20% over the next 2 years. This provides an automatic net income gain of $ 1.14 billion over that period or $ 570 million per year.

In addition, each quarter, the inventory balance is expected to increase an additional $ 3 billion to $ 3.5 billion. This means that over the next year, the company will buy $ 12 billion to $ 14 billion worth of homes.

If this balance increases by 20% over 3 years, total profits could reach $ 4.2 billion or $ 1.4 billion per year. Given that the OPEN stock has a market cap of $ 14.6 billion, this is just over 10 times the implied earnings per year (i.e. $ 14.6 billion / 1.4 billion dollars).

These are gross profit figures and do not include overhead costs. On the other hand, if the company borrows an amount to buy these homes, the leverage will worsen its profits. It therefore serves as a rough model of how to model the stock.

For example, a more appropriate multiple would be at least 15 times the implied profits. Thus, 15 times 1.4 billion dollars corresponds to a market capitalization of 21 billion dollars. This is an increase of 43.8% from Opendoor’s current market of $ 14.608 billion.

Therefore, we can say that at a minimum, the OPEN share should be 43.8% higher at $ 34.65 per share.

Where that leaves the stock open

Other analysts tend to agree with me. For example, Yahoo! Finance, which uses data from Refinitiv’s analyst survey, reports that 6 Wall Street analysts have an average price target of $ 32.67 per share. This is almost identical to my target price of $ 34.65.

What’s more, In search of the alpha indicates that 7 analysts have an average price target of $ 32.67 per share, the same as Yahoo! Finance.

However, TipRanks reports that 4 analysts have written on OPEN shares in the past 3 months and have an average price target of $ 35. It’s also close to my goal of $ 34.65 and represents a potential gain of 44.87% from today’s price.

This means that the sell side is very positive about Opendoor Technologies shares going forward. Even if it takes 2 years for the stock to reach $ 34.65 or 43.8% more, that implies that the average annual return will be 19.9% ​​per annum on a compound basis. For most investors, this is a very good return on their investment.

The risk is that prices will remain stable over this period. This could hurt the company’s returns and increase its costs, in particular its financing costs. However, even at 15 times expected earnings from home sales, the stock appears to reflect downside risks. This is because it is a very conservative multiple. With higher real estate profits, the multiple will likely be more than 20 times.

Most value-oriented investors will therefore begin to acquire a small portion of OPEN shares. And this despite the fact that it is constantly increasing. He is likely to go much higher.

As of the publication date, Mark R. Hake does not hold (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.

Mark Hake writes about personal finance on mrhake.medium.com and run the Total Value of Return Guide that you can consult here.


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