Opendoor (NASDAQ: OPEN) has been a tough stock to own over the past few years. The online real estate company's stock started trading at $31.47 after it went public by merging with a special purpose acquisition company ( SPAC ) in December 2020 and reached its record high of $35.88 during the apex of the growth-stock rally in February 2021.

Since then, however, Opendoor's stock has declined 94% to about $2. It crashed and burned as rising interest rates rattled the housing market, throttled its growth, and drove investors toward more conservative investments. Nevertheless, Opendoor might be an undervalued growth play for investors who can tune out all the near-term noise.

How bad was Opendoor's slowdown?

Opendoor streamlines home sales by making instant cash offers for homes, repairing those properties on its own, and relisting them for sale on its first-party online marketplace. That's different from Zillow and Redfin , which both shuttered their similar first-party home-flipping services in 2022.

Zillow and Redfin both shut down those "iBuyer" (instant buyer) businesses because it was a capital-intensive strategy that was difficult to maintain as interest rates rose. Supply-chain constraints made it difficult to renovate all of the houses they bought, and their own artificial intelligence (AI) pricing algorithms sometimes overvalued the targeted properties.

Despite those growing pains, Opendoor stuck with its first-party iBuyer strategy and worked with third-party partners, like real estate agents, homebuilders, and Zillow, to attract more sellers and buyers. But in 2023, the company's revenue plunged, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin declined, and it stayed unprofitable. Most of that pressure can be attributed to soaring interest rates and a cooling housing market.

Data source: Opendoor. *Based on 498% growth rate reported in 2021.

That slowdown is jarring and even more disappointing when compared to the company's pre-merger outlook for generating $9.8 billion in revenue with a positive adjusted EBITDA margin of 0.1% in 2023. The company clearly benefited from the housing market's feverish growth in 2021 and 2022 as the pandemic-induced headwinds dissipated, but it couldn't sustain that momentum in a high-interest-rate environment.

In the first half of 2024, Opendoor's revenue dropped 47% year over year to $2.7 billion and adjusted EBITDA margin improved to negative 2%, but its net loss widened year over year from $78 million to $201 million. Yet it still bought 8,229 homes, representing 86% year-over-year growth from the first half of 2023, and sold 7,156 homes.

Opendoor expects its revenue to rise 22%-32% year over year in the third quarter of 2024 and finally end its seven-quarter streak of top-line declines. It also expects its adjusted EBITDA margin to stay flat at negative 5%.

That outlook is shaky but suggests the company has passed a cyclical trough and has a shot at recovering as interest rates decline and the housing market warms up. It will also face a lot less competition following Zillow's and Redfin's retreat from the iBuying market.

Opendoor looks undervalued, relative to its growth potential

For 2024, analysts expect Opendoor's revenue to decline 26% to $5.16 billion as its adjusted EBITDA improves from negative $627 million to negative $183 million. But from 2024 to 2026, they expect the company's revenue to grow at a compound annual growth rate (CAGR) of 35% to $9.47 billion as its adjusted EBITDA turns positive in the final year.

We should take those estimates with a grain of salt, but Opendoor is well-positioned to grow again as the macro environment improves. And with an enterprise value of $3.27 billion, its stock still looks dirt cheap at 0.6 times this year's sales.

Opendoor is still a speculative stock with obvious weaknesses. Its business model is wobbly, it ended its latest quarter with a high debt-to-equity ratio of 3, and it only had $790 million in cash and equivalents. But if you believe the company can scale up its business and disrupt the real estate market with its iBuying model, its stock could soar higher as its growth stabilizes.

Before you buy stock in Opendoor Technologies, consider this: