The past six months have been a windfall for Offerpad’s shareholders. The company’s stock price has jumped 170%, hitting $4.62 per share. This performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Offerpad, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Offerpad Will Underperform?

Despite the momentum, we're cautious about Offerpad. Here are three reasons you should be careful with OPAD and a 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 452 in the latest quarter, and over the last two years, averaged 36.4% 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. Cash Burn Ignites Concerns

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Over the last two years, Offerpad’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 7%, meaning it lit $6.95 of cash on fire for every $100 in revenue.

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 $30.28 million of EBITDA over the last 12 months, and its $215.9 million of debt exceeds the $26.75 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

We see the value of companies helping consumers, but in the case of Offerpad, we’re out. After the recent rally, the stock trades at $4.62 per share (or a forward price-to-sales ratio of 0.2×). 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 suggest looking at a top digital advertising platform riding the creator economy.

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