Shareholders of Offerpad would probably like to forget the past six months even happened. The stock has dropped 97.3% and now trades at a new 52-week low of $0.55. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Offerpad, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Offerpad Will Underperform?
Even with the cheaper entry price, we’re swiping left on Offerpad for now. Here are three reasons why there are better opportunities than OPAD, plus one stock we’d rather own.
1. Decline in Homes Sold Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Offerpad, our preferred volume metric is homes sold). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Offerpad’s homes sold came in at 211 in the latest quarter, and over the last two years, averaged 37% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Offerpad might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Offerpad has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 6.9%, below what we’d expect for a consumer discretionary business.
3. Restricted Access to Capital Increases Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Offerpad posted negative $22.99 million of EBITDA over the last 12 months, and its $81.57 million of debt exceeds the $41.63 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
We implore our readers to tread carefully because credit agencies could downgrade Offerpad if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope Offerpad can improve its profitability and remain cautious until then.
Final Judgment
Offerpad falls short of our quality standards. Following the recent decline, the stock trades at $0.55 per share (or a forward price-to-sales ratio of 0×). The market typically values companies like Offerpad based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d recommend looking at one of our top software and edge computing picks.
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