Mortgage rates and home prices have declined from record highs. However, buyers remain significantly hesitant. Moreover, amid a strong job market, further federal rate hikes are expected, which might raise mortgage rates. According to the National Association of Realtors, sales of previously owned homes dropped 1.5% month-over-month in December.
Moreover, according to new data from Fannie Mae, homebuyers’ purchase sentiment remains well below pre-pandemic highs. Doug Duncan, senior vice president and chief economist at Fannie Mae, said, “Respondents continue to cite high home prices and unfavorable mortgage rates as the primary reasons for their pessimism.”
In addition, investors’ pessimism in the real estate industry is evident from the Vanguard Real Estate ETF’s (VNQ) 6.4% loss over the past six months.
Given the backdrop, we think fundamentally weak real estate stocks Opendoor Technologies Inc. (OPEN) and WeWork Inc. (WE) are best avoided in 2023.
Opendoor Technologies Inc. (OPEN)
OPEN operates a digital platform for residential real estate in the United States. The company’s platform enables consumers to buy and sell a home online. It also provides title insurance and escrow services.
OPEN’s trailing-12-month gross profit margin of 5.25% is 92.2% lower than the industry average of 67.39%, while its trailing-12-month negative net income margin of 6.93% compares with the industry average of 16.46%.
OPEN’s gross loss came in at $425 million for the quarter that ended September 30, 2022, compared to a profit of $202 million in the year-ago period. Its net loss and loss per share increased substantially year-over-year to $928 million and $1.47.
OPEN’s revenue is expected to decrease 35.3% year-over-year to $2.47 billion for the yet-to-be-reported quarter ended December 2022. Its EPS is expected to decline 169% year-over-year to negative $0.78 for the same period. It missed EPS estimates in three of four trailing quarters. Over the past year, the stock has lost 75.6% to close the last trading session at $2.36.
OPEN’s POWR Ratings reflect its poor prospects. It has an overall grade of F, which equates to a Strong Sell. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Also, the stock has an F grade for Growth, Stability, and Sentiment and a D for Momentum and Quality. Click here to access the additional POWR Ratings for OPEN (Value). OPEN is ranked #40 out of 42 stocks in the F-rated Real Estate Services industry.
WeWork Inc. (WE)
WE provides flexible workspace solutions to individuals and organizations worldwide. The company offers workstations, private offices, customized floor solutions, and various amenities and services.
WE’s trailing-12-month negative EBITDA margin of 26.46% is lower than the industry average of 55.55%, while its trailing-12-month negative net income margin of 73.67% compares with the industry average of 16.46%.
WE’s cash, and cash equivalents came in at $460 million for the period that ended September 30, 2022, compared to $924 million for the period ended December 31, 2021. Moreover, its net long-term debt came in at $1 billion, compared to $666 million for the same period.
Street expects WE’s EPS to remain negative in 2023. Over the past year, the stock has lost 74.3% to close the last trading session at $1.83.
WE has an overall F grade, equating to a Strong Sell in our POWR Rating system. Also, it has an F grade for Stability and Quality and a D for Value and Sentiment. It is ranked #41 in the same industry.
Access the WE ratings for Growth and Momentum here.
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OPEN shares were trading at $2.34 per share on Wednesday morning, down $0.02 (-0.85%). Year-to-date, OPEN has gained 101.72%, versus a 8.11% rise in the benchmark S&P 500 index during the same period.
About the Author: Riddhima Chakraborty
Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.
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