Opendoor settles algorithm lawsuit for $39M amid profitability concerns
The settlement adds to investor scrutiny as the real estate technology firm grapples with negative margins and a challenging housing market.
Opendoor Technologies (NASDAQ: OPEN) has agreed to a $39 million settlement to resolve a class-action lawsuit alleging the company misled investors about the effectiveness of its home-pricing algorithm. The news comes as the real estate technology firm contends with persistent investor concerns over its path to profitability and intense margin pressures.
While the settlement represents less than 1% of Opendoor's approximately $5.6 billion market capitalization, it lands at a sensitive time for the company. Shares of Opendoor fell nearly 9% in recent trading to $6.92, reflecting broader anxiety surrounding the firm's operational headwinds. The stock has experienced significant volatility, trading in a wide range between $0.51 and $10.87 over the past 52 weeks.
The lawsuit claimed that Opendoor's technology, which is central to its iBuying business model, was not as effective as portrayed and relied heavily on manual oversight, failing to adapt to shifting market conditions. According to details from the settlement filings, this led to allegations that investors were misled about the company’s ability to accurately price homes and maintain profit margins.
Opendoor's financial performance underscores the challenges it faces. The company has a negative profit margin of -5.89% and has struggled to achieve consistent profitability. This settlement, while financially manageable, adds a fresh layer of scrutiny to its core business strategy at a time when the broader housing market remains complex.
Wall Street remains largely skeptical of the company's prospects. The consensus among analysts is a "Moderate Sell," with an average price target of just $1.14, suggesting significant downside from its current trading level. This bearish sentiment was amplified when Citigroup downgraded the stock to "Sell" in August, assigning a price target of $0.70 and citing weaker guidance and heightened execution risk.
Not all analysts share such a dire outlook. Morgan Stanley, while maintaining an "Equal Weight" rating, recently raised its price target to $6.00. This perspective acknowledges Opendoor's ongoing transformation, including a strategic shift towards an agent-led model, which some see as a potential, albeit challenging, path forward.
This strategic pivot is at the heart of the debate over Opendoor's future. The company that once sought to disrupt traditional real estate with its technology-first iBuying model is now integrating more conventional agent services. The move is designed to create a more resilient business, but it also introduces new complexities and execution risks.
Investors are now closely watching whether Opendoor can navigate this transition successfully. The key challenge will be proving it can generate sustainable profits in a fluctuating real estate environment. With a business model that requires significant capital to purchase and hold housing inventory, even small errors in pricing or shifts in market demand can have an outsized impact on its bottom line. The $39 million settlement serves as a costly reminder of the difficulties inherent in trying to predict one of the world's most complex markets.