Opendoor Names a New CEO. Here's What It Could Mean for Investors.

Key Points

• Opendoor's stock has risen over 1,600% in just three months.

• The company has seen the involvement of an activist investor, a CEO departure, and the arrival of a new CEO.

• The company's new CEO is talking about making drastic changes to Opendoor's business.

• 10 stocks we like better than Opendoor Technologies ›

Opendoor Technologies (NASDAQ: OPEN) received a warning letter from the Nasdaq exchange this May that it would be delisted because its stock price was too low. That set in motion a series of events that have turned the stock into a rocket ship, with the shares up over 1,600% in just the last three months. A big part of the story is the company's hiring of Kaz Nejatian as CEO. What does this really mean for investors?

The backstory on Opendoor Technologies

The core business at Opendoor is house flipping. House flipping has long been the purview of small, local investors. The goal is basically to buy a house relatively cheaply, put in some minor improvements, and then sell the house for more than what it cost to buy. Often small investors perform renovation work themselves, helping to keep costs low. Essentially, Opendoor is attempting to scale this up to a large business.

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Image source: Getty Images.

It has not been successful quite yet. That's not to suggest that Opendoor isn't flipping homes, which it has done for years. The problem is that Opendoor hasn't managed to turn a full-year profit as a home flipper. It is still a money-losing start-up. Wall Street clearly saw the risk here and pushed the stock steadily lower until it fell into penny stock land.

Penny stocks are a highly risky niche of Wall Street that only the most aggressive investors should be looking into. As is common for such low-priced stocks, the Nasdaq exchange sent Opendoor a "nastygram" informing the company it was at risk of being delisted because its stock price was too low. To alleviate the issue, the company planned to do a reverse stock split, a normal business tactic in such situations. But reverse stock splits are usually a sign of a severe problem at a company, highlighting the risk of an investment in Opendoor's stock.

Then things started to change very rapidly. The company parted ways with its CEO, at least partly thanks to the involvement of an activist investor. It hired its new CEO, Kaz Nejatian, away from Shopify. And the new CEO started talking about using artificial intelligence (AI) to turn Opendoor's business into a sustainably profitable operation.

OPEN data by YCharts

Opendoor stock takes off like a rocket

It would not be an understatement to suggest that Opendoor's stock price has rocketed higher, again noting it is up over 1,600% in just three months. To be fair, that rise comes from a very low level and the shares are still only trading at around $9. But the shift in mood on Wall Street is huge, with the stock looking very much like it has gotten caught up in the meme stock frenzy of recent years.

The key here is that emotions are driving the stock price. And that is a huge risk, since emotions can just as easily change from positive to negative as they changed from negative to positive here. A huge pullback in Opendoor's share price is entirely possible. Most investors should not be buying Opendoor expecting the stock to keep soaring ever higher.

The real problem here is that investors have priced in a huge amount of positive change even though the new CEO hasn't had enough time to make any material changes. At this point, all Nejatian has are good ideas, including using AI, a hot word on Wall Street, and letting employees go. Both ideas could lower costs and, thus, help Opendoor become profitable. But there's no evidence that it will work. And it will take time and money to make any changes the CEO envisions.

Wait for some evidence of success with Opendoor

Right now, the only thing that investors can expect from Opendoor is change. What those changes actually mean for the business is up in the air. Some investors on Wall Street clearly believe that the changes will lead to a magnificent improvement in the company's financial fortunes. If that doesn't pan out as expected, or if it takes too long, or if it costs too much to get the changes in place, well, investors' moods could shift on a dime.

In other words, after a shocking price advance, uncertainty is what investors can expect from Opendoor right now. All but the most aggressive investors should watch from the sidelines until the new CEO actually has some accomplishments to offer investors as evidence that his changes will turn a money-losing upstart into a sustainably profitable business.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.