Can Artificial Intelligence (AI) Help Turn Opendoor's Business Around?

Key Points

• Opendoor recently appointed Shrisha Radhakrishna as its new interim leader.

• Radhakrishna believes artificial intelligence can help the company in multiple areas of its operations, including pricing and in-home assessments.

• The company has routinely incurred losses and it's carrying more than $2 billion in debt on its books.

• 10 stocks we like better than Opendoor Technologies ›

Artificial intelligence (AI) has been transforming businesses across the globe and across all sectors of the economy. While it may not necessarily fix a broken business, it can help add efficiency, unlock new growth opportunities, and drive down costs.

Those are all things that Opendoor Technologies (NASDAQ: OPEN) could benefit from. Many investors and analysts see the iBuying company as nothing more than the latest meme stock, benefiting from a flurry of hype from retail investors.

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Management, however, hopes to solidify its operations and do more with less, due to AI. Is this a great idea that could make Opendoor a better buy, or is this simply too risky of a stock to hold?

Image source: Getty Images.

Can AI fix the company's biggest struggles?

Opendoor's new president and interim leader, Shrisha Radhakrishna, who took over last month after Carrie Wheeler stepped down, is eyeing AI as a way to improve the company's operations. Radhakrishna sees many ways that AI can be a key part of the company's future growth, helping the business with marketing, pricing, and in-home assessments.

Turning to AI can be a way to improve efficiency, but it'll take time and money to do so. And even then, it's questionable how much generative AI can do for Opendoor's business. Consider that the company's gross margin is typically in just single digits. The iBuying business involves flipping houses and if there's not enough of a spread there to make enough of a margin, it's going to be incredibly difficult for the business to cover its other operating expenses and stay out of the red.

AI may help with pricing, but unless it results in significant margin expansion, it may not necessarily lead to a big payoff for the business and its shareholders.

Many AI projects are falling short of expectations

Excitement around AI has captivated investors, but that doesn't mean that simply throwing money at AI is going to solve problems. In fact, it may create new ones as Opendoor spends excessively without having much to show for it.

According to a recent report from the Massachusetts Institute of Technology, a staggering 95% of companies haven't been generating any meaningful revenue or payoff from their investments into AI. While the hyperscalers and big tech companies with massive budgets have undoubtedly grown their businesses due to AI, the study underscores the importance of keeping expectations in check.

As tempting as it may be to assume that AI will improve a company's operations, that's by no means a sure thing. And that can be particularly concerning for a business such as Opendoor, which has routinely posted losses and which already has more than $2 billion in debt on its books. Last quarter (which ended June 30), its interest expense totaled $36 million -- nearly 3 times the size of its operating loss of $13 million.

Investing into AI likely won't make Opendoor a better stock

Opendoor's business needs a lot of work before it can have a realistic path to profitability and be a good investment option. There's a ton of risk for investors to take on and although the stock has surged more than 300% this year (as of Monday), that doesn't mean the rally is sustainable or that it will continue.

The volatility that comes with Opendoor's stock makes it an unsuitable option for the vast majority of investors to consider for their portfolios. With challenging market conditions, poor financials, and many question marks surrounding the long-term viability of Opendoor's business, this is a stock I'd steer clear of for the foreseeable future. At the very least, you may want to wait until the company actually shows some tangible improvement and payoff from its efforts and AI investments. Otherwise, you could be taking on significant risk. This is a stock that could have a long way to fall given its sharp rally this year and the volatility that comes with it.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.