Why Opendoor Technologies Stock Swooned in June

Next-generation real estate company Opendoor Technologies (NASDAQ: OPEN) wasn't exactly looking like the wave of the future in the first summer month of this year.

June saw the company's stock lose more than 18% of its value, which wasn't all that surprising given a piece of financial engineering it announced toward the start of the month. An analyst's recommendation downgrade also dampened investor sentiment.

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Splitsville

On June 6, the company revealed that it had filed the initial regulatory paperwork to prepare for a reverse stock split. It intends to bring the matter to a vote in a special meeting for its investors.

A reverse stock split is a measure in which a company reduces its total number of shares outstanding. In its press release divulging the news, Opendoor quoted CFO Selim Freiha as saying that the move "is intended to support long-term shareholder value and give us optionality in preserving our listing on Nasdaq."

The company said it aimed to reverse-split its stock at a ratio of one share for every 10, up to 1-for-50.

I should stress here that neither a standard nor a reverse stock split changes the market cap of a stock; only the amount of shares outstanding and the price are modified. The fewer shares, the higher the price in the case of reverses.

Opendoor had intended to hold the special shareholder meeting on Monday, July 28.

The company is vulnerable to downturns in the housing market, as it is essentially a reseller that buys homes, then spruces them up in order to "flip" them on the market and pocket a profit. This is a juicy business model when housing is on an upswing, but it can produce major headaches if the market is stagnant or heading south.

An analyst became more bearish

As June worked its way to a finish, a new analyst report threw a bit of a shadow on Opendoor stock. CItizens JMP's Andrew Boone re-evaluated his take on the company and elected to downgrade his recommendation on the shares. Now Boone believes Opendoor only rates a market perform (i.e., hold) instead of a market outperform (buy).

According to reports, the basis for Boone's new view is his belief that Opendoor seems to be functioning more as a backup option for people trying to sell their homes, rather than as their primary means of sale. He also mentioned the company's high level of debt, which has become expensive to service.

On a brighter note, he said that Key Connections, a new program that connects partner real estate agents with sellers, could help Opendoor improve its fortunes.

To me, Opendoor is a company that has some interesting ideas for how to profit from real estate. It hasn't yet turned these concepts into a viable business, however, so I would give its stock a pass until more signs of potential success emerge.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.