Opendoor Is Repurchasing 5% of Its Outstanding Shares. Here's What That Means for the Company.

A brutally frozen housing market has taken a toll on the stock prices of many different businesses. Homebuilders, makers of construction supplies, and real estate brokerages are all in the doldrums. One previously hot stock trying to turn things around amid this headwind is Opendoor Technologies (NASDAQ: OPEN).

The iBuying platform operator got a new CEO last year and recently announced it had taken out convertible debt to raise funds to repurchase 5% of its outstanding stock. Despite these headlines, its shares continue to fall due to the pain in the housing market and the business's inability to generate a profit.

Here's what the transaction means for the company, and whether Opendoor stock looks like a good value right now.

Financial engineering, but at what cost?

Convertible notes are bonds with low interest rates -- sometimes as low as zero percent. But investors in said bonds can convert them into newly issued shares of stock at a certain price, which is a good deal if the stock is trading above that level.

Opendoor just took out 0% 2030 convertible notes -- meaning they are due in 2030 -- worth $650 million. It is using $158 million of this capital to repurchase around 5% of its common stock, as announced in a press release. The convertible price for these bonds is just $4.71, which is about a 32% premium versus Wednesday's closing share price of $3.58.

To offset potential dilution, Opendoor bought capped calls, which artificially inflate the conversion price. In this case, the new converted price is $6.98, below which no shareholder dilution will occur.

While management may proclaim that this is a bond with no upfront costs, the actual cost to shareholders will be borne in these capped-call transactions (a direct cash cost at the time of bond issuance), and in potential dilution years down the line. Bondholders could see significant gains if the stock price rises from here, which existing shareholders will pay for through new share issuance. Otherwise, Opendoor will be forced to repay the principal in cash.

Image source: Getty Images.

A business model in need of repair

Financial engineering can create value for shareholders, provided a business is doing well. Opendoor is on a shaky financial footing.

Last quarter, revenue fell by nearly half year over year to $883 million. With slim gross margins on the iBuying business, its gross profit was just $86 million. The business model is to buy homes directly from consumers and resell them, which comes with low gross margins and requires stuffing existing inventory on the balance sheet, sometimes funded with debt.

Existing home sales in the United States are down to around 4 million a year, as compared to over 5 million a year prior to the COVID-19 pandemic. Opendoor has failed to gain market share with its iBuying strategy, which has been a double-edged sword amid this macroeconomic environment. The company posted a net loss of $162 million last quarter, and it has never generated a profit.

OPEN Gross Profit (TTM) data by YCharts.

Should you buy Opendoor stock?

Management taking out a nifty convertible bond does not change anything about Opendoor's failed business model. The company is trying to pivot to new business strategies, such as automated pricing and offering new services to homebuyers and sellers, but it is failing to generate interest at the moment.

A frozen housing market is going to make it difficult for even the best businesses in the sector, let alone one that has never generated a profit. Right now, Opendoor's market cap of $3.25 billion is more than 10 times its trailing gross profit generation. (We cannot value Opendoor relative to its earnings since it has none.) Gross profits have been declining for many quarters.

Add everything up, and this repurchase authorization fueled by debt is likely a bad sign for the company, not a good one. Avoid buying the dip on Opendoor stock.

Brett Schafer 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.