Is Opendoor Technologies on a Path to Profitability?

Opendoor Technologies (NASDAQ: OPEN) has been one of the hottest stocks with retail investors this year. Many see it as nothing more than the latest meme stock, but the company is making efforts to improve its margins and strengthen its financial health.

Its new CEO is looking to leverage artificial intelligence (AI) to help with that.

The company, which is in the business of flipping houses, recently reported earnings. Management believes it's making progress and that it is going in the right direction.

But should investors believe that, and is the business truly on the path to profitability, or is this still a highly risky stock to buy right now?

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Opendoor still has a long way to go to breakeven

On Nov. 6, Opendoor reported its third-quarter earnings, and the headline was that it has charted a "path to profitability through software and AI." The company's CEO Kaz Nejatian has been on the job for about two months but says the company has already been making significant progress with the launch of over a dozen AI-powered products, which should make the company less reliant on consultants, and thus, reduce costs.

Today, however, it still has a lot to prove. For the period ended Sept. 30, Opendoor's revenue declined by 34% year over year. But the most concerning aspect for me remains its incredibly low gross profit of just $66 million, which translates into a gross margin of just 7.2% -- down from an already low 7.6% in the prior-year period. Without much stronger margins, there will be little to no hope of the company achieving breakeven anytime soon.

Management sees profitability ahead, but on an adjusted basis

The company says that by the end of next year, it'll be on track for hitting breakeven on a 12-month go-forward basis -- but that will be based on adjusted net income. These aren't true accounting earnings and can involve several adjustments. Investors should always be cautious about adjusted profitability numbers because they aren't standardized and there can be a lot of room for manipulation.

This past quarter, the company's adjusted net loss was $61 million versus its true accounting loss of $90 million. The company added back stock-based compensation and adjusted for changes in inventory valuation, a loss on extinguishment of debt, and restructuring charges. There can potentially be a lot of noise when it comes to adjusted earnings numbers, which is why it's important to tread cautiously when relying on them.

While the company may say that it's on track for profitability on this metric, the proof will be in the gross margin. If that improves, then Opendoor may be able to get to breakeven, but it's by no means a sure thing. And what's troubling is that gross margin actually worsened this past quarter. But with the CEO still being fairly new, it can take some time to see any payoff from the company's latest moves.

Opendoor isn't any safer of a stock to own today

Opendoor is still going to primarily appeal to retail investors who have a high tolerance for risk. Its latest financial results did little to show that it's a safe buy. With challenges on both the top and bottom lines, particularly with economic conditions not looking all that strong right now, it's bound to be a bumpy ride for Opendoor in the near future.

Although the stock has soared more than 400% this year, that's more to do with the hype and excitement around its focus on using AI to enhance its operations rather than its improving fundamentals, as this is a very risky stock to own. For the vast majority of investors, there are better and safer growth stocks to buy than Opendoor Technologies; it simply isn't worth the risk at this stage.

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.