Opendoor and AI: A Risky Bet or a Path to Recovery?

Opendoor and AI: Is it a Magic Bullet?

Artificial intelligence (AI) is reshaping businesses across the globe and across all sectors of the economy. While it may not necessarily fix a broken business model, it can help add efficiency, unlock new growth opportunities, and drive down costs. These are precisely the things that Opendoor Technologies (OPEN 1.08%) needs.

Many investors and analysts view Opendoor as just another meme stock, benefiting from short-lived hype. However, management hopes to solidify its operations and achieve more with less, thanks to AI. Is this a great idea that could transform Opendoor into a better investment, or does it remain a high-risk stock?

Can AI Address Opendoor's Biggest Struggles?

Opendoor's new president and interim leader, Shrisha Radhakrishna, who took over last month after Carrie Wheeler stepped down, is looking to AI as a way to improve the company's operations. Radhakrishna sees AI playing a key role in future growth, assisting with marketing, pricing, and in-home assessments.

Turning to AI could boost efficiency, but it requires time and capital. Even then, the extent to which generative AI can truly benefit Opendoor's business is uncertain. Consider that the company's gross margin typically hovers in the single digits. The iBuying model involves rapid house flipping, and without a sufficient profit margin, covering operating expenses and avoiding losses becomes exceedingly difficult.

While AI might refine pricing strategies, significant margin expansion is crucial for it to truly benefit the company and its shareholders. Simply improving pricing accuracy may not be enough.

AI Projects Often Fall Short of Expectations

The AI hype has captivated investors, but simply throwing money at AI isn't a guaranteed solution. It could even create new problems if Opendoor overspends without tangible results.

A recent report from MIT revealed that a staggering 95% of companies haven't generated meaningful revenue or returns from their AI investments. While hyperscalers and big tech firms with massive budgets have undeniably grown through AI, the study highlights the need for realistic expectations.

Assuming AI will automatically improve operations is a dangerous gamble. This is particularly concerning for Opendoor, which consistently posts losses and carries over $2 billion in debt. In the last quarter (ending June 30), interest expenses totaled $36 million – nearly triple the operating loss of $13 million.

AI Investment May Not Improve Opendoor's Stock

Opendoor's business model requires substantial improvements before it can realistically achieve profitability and become a sound investment. Investors face considerable risk, and although the stock has surged over 300% this year (as of Monday), this rally may not be sustainable.

The volatility associated with Opendoor's stock makes it unsuitable for most investors' portfolios. Given challenging market conditions, weak financials, and uncertainty surrounding Opendoor's long-term viability, I'd avoid this stock for the foreseeable future. At the very least, wait for tangible improvements and returns from its AI investments. Otherwise, you risk significant losses. The stock's sharp rise this year, coupled with its inherent volatility, suggests a potential for a substantial decline.