Market

Opendoor Stock: Opportunity Seldom Knocks Twice (NASDAQ:OPEN)

knocking on the door to opportunity

BrianAJackson/iStock by way of Getty Images

Here’s a knock-knock joke for you.

Knock-knock!

Who’s there?

Opportunity.

Opportunity who?

You idiot. Opportunity solely knocks as soon as.

I consider this joke displays Opendoor Technologies Inc.’s (NASDAQ:OPEN) present share value. It is a golden alternative, and it might not come knocking at your door the second time!

With that out of the way in which, this is a deep dive on Opendoor. Enjoy!

Investment Thesis

Opendoor, the iBuying juggernaut, is disrupting the residential actual property trade. The firm dominates the iBuying area, supported by its know-how, scale, community results, and model moats.

While Opendoor has a protracted development runway forward, the corporate faces a difficult macro setting characterised by rising rates of interest and unstable house costs. However, the corporate has a extremely liquid stability sheet, sturdy worth proposition, and dynamic pricing mannequin that ought to defend the enterprise throughout the darkish days forward.

That mentioned, the selloff presents an unimaginable alternative for buyers. Opendoor is a Strong Buy.

Value Proposition

Traditionally, the method of shopping for or promoting a house is complicated, unsure, time-consuming, anxious, and offline. When promoting a house, for instance, homeowners need to undergo an emotionally draining course of together with discovering an inventory agent, getting the house “sale ready,” internet hosting open homes, negotiating presents and concessions, and conducting inspections. Not to say, house sellers must coordinate with the totally different events – together with the vendor agent, purchaser agent, mortgage dealer, escrow officer, movers, and extra – consistently speaking forwards and backwards with them. All these may take months earlier than the transaction closes, which by the way in which, has a 20% likelihood of falling by between signing and shutting, forcing the vendor to return to sq. one if that have been to occur.

Furthermore, house sellers must discover a new house as nicely upon promoting their previous properties. As such, they should take care of the challenges related to house shopping for, together with qualifying for mortgages, gathering money for down funds (which depend on their earlier properties being bought), and a complete new spherical of negotiating forwards and backwards. There’s additionally a excessive probability of the “double move” the place they should settle at a short lived dwelling earlier than they transfer into the brand new house.

The slide under reveals what the typical individual has to take care of when transferring properties, incurring as a lot as 12%+ of the transaction worth. It is not any shock that transferring is dubbed as one among, if not, probably the most anxious occasion in a single’s life.

Opendoor goals to take away the ache of transferring for good.

traditional agent process

Source: Opendoor November 2020 Analyst Presentation

Founded in 2014, Opendoor is an end-to-end platform that provides shoppers the facility to purchase and promote properties on-line by the Opendoor app or web site, digitizing the normal transferring expertise.

Mission: To empower everybody with the liberty to maneuver.

Opendoor app store

Source: App Store

Opendoor presents an all-in-one platform that unifies and simplifies the patron’s complete house shopping for and residential promoting journey:

Sell to Opendoor

Homeowners can promote their properties on to Opendoor. The course of could be very easy. A buyer can request a proposal by getting into her tackle at Opendoor’s web site or app (requesting a proposal is free). Through Opendoor’s AI-enabled pricing algorithm, the shopper will then obtain a proposal together with the supply value, service cost, and estimated closing prices.

If the shopper is glad with the supply, Opendoor will then conduct a digital inside and exterior house evaluation to confirm the situation of the house and finalize the supply. If repairs are wanted, the shopper will likely be charged a restore credit score, which will likely be deducted from the online proceeds of promoting the house – prospects do not need to take care of repairs. Once the shopper is proud of the worth, she will be able to then choose her most well-liked cut-off date.

Compared to the normal course of, promoting to Opendoor is totally digital and all costs and charges are laid out clearly upfront. In addition, there aren’t any brokers, no negotiations, no visits, no repairs, no hidden prices, and no fall-through danger. Just a easy, sure, and clear transaction expertise.

As of year-end 2021, Sell to Opendoor is accessible in 44 markets.

Opendoor process

Source: Opendoor Website

Buy with Opendoor

Home seekers can self-tour or just about tour properties listed on the Opendoor platform, at their comfort. Customers can then submit a proposal to purchase a house they’re excited about. Unlike the normal course of, prospects can submit a proposal backed by Opendoor’s money. Launched in early 2021, Opendoor Backed Offers allows certified consumers to make a proposal backed by Opendoor’s money. This won’t solely improve their probability of successful the bid but in addition give sellers absolute certainty by way of fee. It’s a win-win-win scenario.

In my opinion, the Opendoor Backed Offers is a game-changing function because it provides common prospects the buying energy and in the end, a level-playing area for them to compete with different consumers, notably the rich.

Once the shopper has obtained financing, the transaction may be accomplished. If for some motive, the shopper faces some financing points, Opendoor should buy the house first so no different purchaser will get it. Once prepared, the shopper can buy the house again on the similar value paid by Opendoor. In addition, if the shopper is unhappy along with her new house, she will be able to promote it again to Opendoor inside 90 days.

Buy with Opendoor is presently supplied in 16 markets.

Buy with Opendoor

Source: Opendoor Website

Opendoor Home Loans

Customers can work with any licensed mortgage lender or use Opendoor Home Loans to acquire the financing that they want. In November 2021, Opendoor acquired PurpleDoor, a digital-first mortgage dealer, to strengthen its finance providing. The acquisition additionally allows prospects to shortly apply for a house mortgage with a 60-second pre-approval course of.

Opendoor Home Loans is presently accessible in 26 markets.

Title and Escrow

In 2019, Opendoor additionally acquired OS National to supply prospects a “fully digital, integrated and self-serve closing process”. OS National had been a companion of Opendoor since 2016 and the acquisition meant that Opendoor can embed title insurance coverage and escrow providers beneath one platform.

Opendoor Exclusives

Homes lately acquired by Opendoor are additionally solely supplied to prospects by Opendoor Exclusives. These properties are supplied to prospects for 14 days earlier than they’re listed to the general public, usually at cheaper off-market, no-haggle costs.

Opendoor Complete

Opendoor Complete brings all the beforehand talked about services right into a single, streamlined expertise. The service was launched in August 2021 and it supplies prospects with an all-in-one transferring answer, serving to them handle their transfer all through the whole house promoting and shopping for worth chain. It’s that simple.

In abstract, Opendoor’s platform goals to assist folks transfer shortly, seamlessly, and freely with peace of thoughts. Although Opendoor pioneered the idea of iBuying, the corporate aspires to be a lot greater than its core providing. As the This fall Shareholder Letter states:

Opendoor’s ecosystem is a two-sided native market between house sellers and residential consumers with Opendoor properties and providers on the heart of the transaction.

We will likely be creating an e-commerce-like checkout expertise for house consumers. This means we will likely be integrating each the PurpleDoor and Pro.com merchandise into our purchaser expertise and enabling prospects to buy a house, tour it, prequalify for a mortgage, make a proposal, choose upgrades and repairs, and purchase the house of their goals with simply their cellular gadget.

Market Opportunity

In phrases of the macroeconomic setting, the housing market continues to be purple scorching as consumers are pounding the desk to purchase properties at record-high costs, at record-low stock. According to Redfin (RDFN), the 4-week interval ending April 3 noticed median house sale costs reaching one more document excessive, up 16% YoY from final yr. As you may see, home costs are additionally manner larger than 2020 ranges. Do notice that Home Price Appreciation (HPA) is a tailwind for Opendoor, to a sure extent.

Median Sale Price

Source: Redfin

Ever because the pandemic hit, housing stock has been very low whereas the market take care of excessive stock turnover charges. The graph under reveals the median variety of days that homes are in the marketplace. As you may see, the median days in the marketplace are decrease than standard, exhibiting that demand continues to be scorching. According to Redfin, the median days in the marketplace have been 19 days, in comparison with 27 days a yr in the past. Lower median days in the marketplace are a tailwind for Opendoor as it will probably unload stock sooner, reducing holding prices as nicely.

Days on Market

Source: Redfin

This shopping for frenzy, after all, was fueled by ultra-low rates of interest and mortgage charges. However, specialists count on the housing market to chill off because the Fed hikes rates of interest and mortgage charges. As you may see, Homebuyer Mortgage Payments rose 31.8% YoY as mortgage charges spiked from 3.13% a yr in the past, to 4.72%. As such, demand ought to cool off, permitting stock and home costs to stabilize. In truth, Redfin reported that 12% of properties had value drops up to now 4 weeks.

Median Mortgage Payment

Source: Redfin

While larger rates of interest are anticipated to decelerate the housing market, they should not curb demand considerably. As proven under, Mortgage Debt Service Payments as a Percentage of Disposable Personal Income is the bottom it has ever been, which signifies that consumers can nonetheless afford a reasonable rise in rates of interest.

Mortgage Debt Service Payments as a Percent of Disposable Personal Income

Source: FRED

Without a doubt, Opendoor faces a difficult and unstable macro setting. But I consider that fears of a housing crash and Opendoor chapter are overblown. Just have a look at the chart under. During the 2008 Financial Crisis, the Median Sales Price of Houses Sold dropped by solely 20% from peak to trough. As we’ll talk about additional later, Opendoor’s know-how ought to be capable to face up to such drawdowns.

It can be essential to notice that the long-term trajectory of residential properties has at all times been up and to the appropriate. This is a long-term tailwind for Opendoor.

Median Home Sales Price

Source: FRED

Macro issues apart, the long run has by no means been brighter for Opendoor. Real property is the biggest asset class on the earth and but, now we have not seen main technological adoption or disruption within the trade. According to Opendoor, the residential actual property market noticed $2.3 trillion in transaction quantity in 2021. iBuyers bought near 70,000 properties, which ends up in a market share of about 1.3%. If we take away the 24,000 properties acquired by Zillow (Z), the penetration price is simply 0.9%. This reveals that there is nonetheless substantial room for development for Opendoor.

Furthermore, iBuyer market share is rising quickly yearly, and now’s greater than double from 2019 ranges. This reveals that though 99% of residential actual property transactions nonetheless occur offline, there is a fast shift in the direction of digital transactions, which ought to profit Opendoor in the long term.

iBuyer market share

Source: Mike DelPetre

As CEO Eric Wu famous within the This fall earnings name:

Competition has not impeded our development, and we do outline our competitors because the 99% of transactions which might be offline.

Business Model

One of the commonest misconceptions about Opendoor is that the corporate is a house flipper. This is a mistake of the best order.

Home flippers have a “buy low, sell high” mentality, buying distressed properties, renovating them, and promoting them at larger values.

On the opposite hand, Opendoor buys properties which might be in good situation, renovates them, and presents consumers aggressive costs. Opendoor doesn’t intend to make cash from “flipping” homes. Instead, the corporate runs a fee-based enterprise mannequin, gathering service charges very like how brokers earn commissions. Currently, Opendoor has a flat service cost payment of 5%.

Sure, Opendoor stands to learn from HPA. However, Opendoor intends to maintain this service payment as little as doable, permitting the corporate to facilitate extra transactions on the platform. In truth, the corporate has dropped this price from a historic excessive of 14% to simply 5%.

Furthermore, Opendoor’s pricing construction is rather more easy in comparison with conventional brokers, that are infamous for charging hidden charges. Not solely are Opendoor’s charges decrease, however Opendoor additionally presents extra velocity, comfort, and transparency.

Opendoor vs tradition agents

Source: Opendoor

On prime of the flat 5% service payment, Opendoor additionally expenses closing prices, which cowl objects like title insurance coverage, escrow charges, and Homeowners’ Association payment. This is a part of each house sale and it sometimes ranges from 1% to 4%.

As talked about earlier, Opendoor additionally expenses restore prices, if wanted. This price will likely be netted out of the proceeds from the house sale.

In addition, Opendoor additionally presents ancillary providers equivalent to Opendoor Home Loans, Opendoor Complete, and Title and Escrow Services, that are accretive to the corporate’s total margin profile.

Costs of Revenue primarily include the property buy value, restore prices, and stock valuation changes. Inventory holding prices and financing prices are additionally main prices however they aren’t included in Costs of Revenue.

Put merely, Opendoor is just not a house flipper, however slightly, a market maker, a “two-sided local marketplace.”

Growth

In FY2021, Revenue grew by 211% to $8.0 billion. In This fall alone, Revenue accelerated to $3.8 billion, up a whopping 1,436% YoY. This large development determine is because of a lot decrease stock ranges in FY2020 as the corporate paused house purchases within the wake of the pandemic. Nonetheless, it’s nonetheless a 69% improve from FY2019 Revenue of $4.7 billion.

Opendoor Revenue

Source: Opendoor Investor Relations and Author’s Analysis

The surge in Revenue was primarily resulting from a better variety of Homes Sold and better Revenue per house. In FY2021, Opendoor bought a complete of 21,725 properties with Revenue per house bought 42% larger than the earlier yr. Opendoor is ready to promote extra properties as iBuyers proceed to seize market share in an more and more digital world, in addition to increasing into new markets, rising its market depend from 21 to 44 markets, YoY.

Opendoor homes bought and sold

Source: Opendoor Investor Relations and Author’s Analysis

In Q3, Opendoor went on a buying spree, buying a document 15,181 properties. The firm dialed again on house acquisitions, buying solely 9,639 properties in This fall. The document house shopping for in Q3 was adopted by document house promoting of 9,794 items in This fall, displaying sturdy market demand.

In my earlier Opendoor article, I addressed my issues concerning Opendoor’s aggressive iBuying however lagging iSelling in Q3. However, This fall proved to me that Opendoor put a number of thought into stock administration, in addition to the power of its iSelling system.

As a outcome, Homes in Inventory remained flat QoQ as administration proceeded into the brand new yr with further warning. As of This fall, Opendoor had 17,009 Homes in Inventory with a complete worth of $6.1 billion, a 1,208% improve from final yr.

Opendoor inventory

Source: Opendoor Investor Relations and Author’s Analysis

Profitability

While enterprise development has been spectacular, profitability stays a priority. FY2021 Gross Profit grew 232% to $730 million. However, as we’ll see for different profitability metrics, margins have been in a downward pattern over the previous couple of quarters.

Opendoor Gross profit

Source: Opendoor Investor Relations and Author’s Analysis

Contribution Margin After Interest – which accounts for direct promoting prices, holding prices, and curiosity expense – dipped to simply 3.3%, down from the highs of 12.2%. This metric highlights how a lot Opendoor makes per house bought. As highlighted by administration, the drop in margins is because of two non permanent traits: stock combine and HPA. Here’s CFO Carrie Wheeler to elucidate (emphasis added):

When you consider the margin trajectory for 2021 and sort of what drove the trajectory, we have been very express that we had 2 giant however non permanent components that have been driving extra margin within the first half of the yr.

One was we got here into the yr with primarily no stock, having sort of bought the stock throughout COVID and rebuilding that again up. That was actually good for margins and we knew would dissipate on the course of the 1.5 years or sort of again to regular given a $6 billion stock stability.

And the second a part of that was the truth that as we got here–flip round our market, we got here into the primary a part of the yr, we intentionally made some conservative underwriting choices relative to what was that point very, very excessive HPA and that flowed by into resales, into realized margins. Again, that was comparatively extreme, relative to our 4% to six% with the guardrail. So it wasn’t that we missed on gross margin is like that we disclosed the trajectory we name for all yr lengthy.

Opendoor Contribution profit

Source: Opendoor Investor Relations and Author’s Analysis

iBuying is already a low-margin enterprise and the falling margins make buyers uneasy. However, buyers should not be scared as administration has anticipated this normalization. Furthermore, actual cash comes when Opendoor good points economies of scale. The firm eats “BPs (basis points) for breakfast,” constructing the bottom price platform in an try to please prospects.

As an increasing number of prospects purchase and promote by Opendoor, the numbers can stack up in a short time, each in absolute and marginal phrases, particularly with the addition of high-margin ancillary services. Opendoor presently makes $13k per house bought. This occurs to be its twentieth consecutive quarter of constructive contribution revenue, which speaks volumes in regards to the firm’s skill in weathering by a unstable housing market.

Opendoor contribution profit per home sold

Source: Opendoor Investor Relations and Author’s Analysis

Moving down the revenue assertion, we will see that Sales, Marketing, and Operations Expenses make up the vast majority of Operating Expenses. This consists of resale transaction prices, dealer commissions, promoting prices, holding prices, and personnel bills. G&A Expenses spiked resulting from excessive SBC bills because of going public. It can be value noting that Opendoor laid off 600 workers in April 2020, a cost-cutting measure early throughout the pandemic. R&D stays the bottom part.

Opendoor operating expenses

Source: Opendoor Investor Relations and Author’s Analysis

As proven under, Operating Profit Margin could be very near constructive, at (3)%. It is bettering every quarter regardless of investing in a lot of new initiatives equivalent to Opendoor-Backed Offers, Opendoor Complete, and launching in 23 new markets. In This fall, Opendoor elevated Operating Expenses by 256% whereas Revenue grew by 1,436%, exhibiting sturdy working leverage.

Opendoor operating profit

Source: Opendoor Investor Relations and Author’s Analysis

Similarly, Adjusted Net Profit is near profitability. The current plunge in This fall is because of larger curiosity bills because of a better debt stability with a purpose to fund house acquisitions over the previous couple of quarters.

Opendoor adjusted net income

Source: Opendoor Investor Relations and Author’s Analysis

All in all, Opendoor is exhibiting fast topline development in addition to potential profitability for the brand new yr as the corporate good points economies of scale.

Financial Health

As of year-end FY2021, Opendoor has $2.2 billion of Cash and Short-term Investments. In FY2020, Opendoor has a detrimental Net Debt place as the corporate decreased house shopping for considerably within the wake of the pandemic. However, Opendoor started ramping up house purchases over the previous couple of quarters, which is why its Net Debt place has turned constructive, at $4.9 billion as of the most recent quarter.

Opendoor balance sheet

Source: Opendoor Investor Relations and Author’s Analysis

Total Debt stands at $7.1 billion however Opendoor nonetheless has $4.7 billion of undrawn borrowing capability beneath its non-recourse asset-backed debt amenities. As such, Opendoor can fund as much as $10 billion of Inventory, which might suggest about $30 billion of house acquisition volumes based mostly on typical stock turnover charges.

With that mentioned, Opendoor’s enterprise mannequin is taken into account capital intensive as the corporate must faucet into the debt markets to fund development and facilitate transactions. Furthermore, debt funds are collateralized by Opendoor’s actual property stock. However, I don’t see any substantial default dangers as Opendoor’s stability sheet is very liquid with a Current Ratio of 2x and the corporate has proven that it will probably flip stock shortly:

As of December 31, 2021, solely 8% of our properties had been listed in the marketplace for greater than 120 days. Our stock was more healthy than the general market the place 24% of properties had been listed for greater than 120 days, adjusted for our buybox.

Opendoor’s money circulation assertion has an in depth resemblance to REITs the place there are giant money actions, notably with borrowing debt, utilizing it to amass properties, after which repaying debt utilizing the proceeds from property gross sales or leases. This is known as capital recycling.

As proven under, the vast majority of money circulation occurs in Operating and Financing actions. Cash from Operations actions has been detrimental as the corporate builds up stock. The firm makes use of money from Financing actions to fund these transactions. However, we will see that money circulation from Operating and Financing actions is beginning to converge as Opendoor pares again on house acquisitions.

Opendoor cash flow

Source: Opendoor Investor Relations and Author’s Analysis

When there is a wholesome stability between iBuying and that iSelling, we will count on wholesome money circulation actions. That is what we’re really seeing within the newest quarter as the corporate bought and bought 9,639 and 9,794 properties, respectively. As a outcome, Free Cash Flow turned constructive throughout the newest quarter. Over the long term, I’d count on to see this iBuying/iSelling stability as Opendoor acts as a market for each consumers and sellers, not simply sellers.

Opendoor Free Cash Flow

Source: Opendoor Investor Relations and Author’s Analysis

It can be value noting that almost all of Opendoor’s financing actions include short-term borrowings, so buyers must preserve an eye fixed out for Opendoor’s main debt obligation (first line).

Opendoor contractual obligations

Source: Opendoor FY2021 10-Okay

Guidance

Turning to steerage, administration expects Q1 Revenue to develop 462% to $4.2 billion, which is an annual run price of $16.8 billion. I consider that is too conservative given Opendoor’s monitor document of beating expectations.

Opendoor actual vs consensus

Source: Seeking Alpha

AEBITDA is anticipated to be about $35 million, a 0.8% margin. Contribution Margins are additionally anticipated to enhance sequentially QoQ. Again, I consider we’re going to see much-better-than-expected profitability metrics in Q1.

According to Mike DelPetre, Opendoor’s buy-to-list premium is at document highs, which can circulation by Opendoor’s prime and backside traces. Opendoor’s lagging Contribution Margins in This fall have been resulting from low buy-to-list premiums. As of March this yr, Opendoor’s premium is at 17% or $60k per house! Expect a blockbuster quarter in Q1!

In the long run, nevertheless, administration expects long-term Contribution Margins of seven% to 9%, which incorporates excessive margin providers.

Opendoor buy-to-list premium

Source: Mike DelPetre

Competitive Moats

Based on my analysis and evaluation, I recognized 5 aggressive moats for Opendoor: know-how, scale, community results, model, and monopoly.

Technology

Opendoor leverages AI and ML to energy its pricing algorithm and danger administration fashions, automating the preliminary presents that the corporate sends to potential sellers.

Offers are dynamically priced based mostly on a number of components together with macro circumstances, house circumstances, comparable properties, location, demand forecasts, stock, and so forth. Through its expertise assessing 375,000+ properties, Opendoor makes use of 100+ information factors to make roughly 1.4 billion changes to MLS information, providing prospects aggressive costs. The velocity, flexibility, and flexibility of Opendoor’s pricing mannequin are what units it aside from conventional opponents.

In addition, Opendoor’s danger administration know-how serves as a sturdy raincoat throughout stormy seasons.

  • First, the corporate focuses on high-velocity, short-duration transactions thereby limiting excessive holding intervals and prices.
  • Second, its pricing fashions adapt to altering market circumstances every day, all the way down to a person house degree.
  • Third, expertise from working throughout 44 markets allows Opendoor to leverage information in a diversified portfolio.
  • Fourth, properties are in sale-and-move-in-ready circumstances for Buy with Opendoor prospects, thus rising the probability of a conversion.

Opendoor technology

Source: Opendoor November 2020 Analyst Presentation

Scale

Opendoor is by far the biggest participant within the iBuying trade. Compared to opponents Zillow (Z) and Offerpad (OPAD), Opendoor is king. With Zillow exiting the trade, Offerpad is the subsequent main competitors, which solely purchased 9,023 properties in 2021, in comparison with Opendoor’s 36,908 properties.

ibuyers homes purchased

Source: Opendoor Investor Relations and Author’s Analysis

The similar goes for the variety of properties bought. Offerpad bought 6,373 properties versus Opendoor’s 21,725 items bought.

iBuyers homes sold

Source: Opendoor Investor Relations and Author’s Analysis

Opendoor is accessible in 44 markets and has processed 140,000+ buyer transactions since inception.

Many thought that Opendoor’s fast development is unsustainable and that it might come at the price of widening losses. Instead, the corporate is gaining economies of scale as fastened prices are unfold amongst a bigger variety of properties.

In pricing, we have been in a position to concurrently scale back our pricing uncertainty, whereas rising our buybox by 50% year-over-year, enabling us to offer presents on greater than 60% of all transactions in our lively markets. Operationally, our investments in know-how drove vital efficiencies, leading to our skill to ship almost six occasions the house assessments and repairs and almost 110 foundation factors of operational price construction enhancements over final yr. These investments have additionally allowed us to effectively scale the variety of prospects we service by over 250% from the prior yr and effectively increase our market footprint, doubling the variety of our markets in 2021.

Network Effects

Opendoor is a companion with over 70 homebuilders, together with eight of the highest ten homebuilders. The firm additionally has over 700 commerce companions and native service suppliers for house repairs and upkeep. It has additionally partnered with Realtor.com which has over 100 million month-to-month lively shoppers, brokers, and brokers. More lately, Opendoor acquired Pro.com and Skylight, to boost its house renovation course of, increasing its community of contractors for building and renovation. In addition, Opendoor additionally acquired PurpleDoor to spice up its digital mortgage financing providing.

As a vertically-integrated platform with a rising community, Opendoor is ready to connect extra providers as prospects are prepared to pay for comfort. For instance, Title and Escrow Services have an 80% connect price, with Revenue for the class rising 140% YoY. This is just the start and every new buyer, product, and companion added to the ecosystem will result in highly effective community results.

Brand

Opendoor has a Net Promoter Score of 80+, which is remarkable in the actual property trade. The firm has the next rankings:

  • Apple App Store: 4.7/5.0 with 4,479 opinions
  • Reviews.io: 4.4/5.0 with 2,377 opinions

On the opposite hand, Offerpad’s opinions are miserable:

  • Apple App Store: 3.4/5.0 with 74 opinions
  • Reviews.io: 2.5/5.0 with 10 opinions

When coping with probably the most anxious occasions of their lives, prospects will need to work with probably the most reliable model on the market, that’s, Opendoor.

Virtual Monopoly

In his guide Zero To One, Peter Thiel highlighted 4 traits that make up a monopoly:

  • Proprietary know-how
  • Economies of Scale
  • Network results
  • Brand

Opendoor holds all 4 traits of a monopolistic enterprise.

Previously, the introduction of Zillow Offers was a significant risk to Opendoor’s existence, as Zillow is the “king of online real estate” and its huge quantity of information may overthrow Opendoor. Well, let’s check out Contribution Margin After Interest for all three iBuyers. You can see why Zillow exited the iBuying enterprise. Zillow is a way more worthwhile enterprise than Opendoor and but, the corporate calls it quits as Opendoor eats Zillow’s foundation factors for breakfast.

Contribution Margin After Interest

Source: Opendoor Investor Relations and Author’s Analysis

Zillow’s departure means two issues:

  1. Opendoor has superior pricing and danger administration know-how.
  2. The iBuying area has very excessive obstacles to entry.

With Zillow out of the image, Opendoor has roughly 80% market share within the iBuying area. As such, Opendoor is just about a monopoly.

Valuation

It is hard to worth Opendoor as the corporate has only in the near past gone public. To make issues worse, there’s just one different comparable firm, Offerpad. Nonetheless, this is what valuation multiples appear like.

Opendoor peer valuation

Source: Seeking Alpha, Koyfin, and Author’s Analysis

Opendoor is valued at an EV/Sales a number of of 0.6x. While this will look low cost, Opendoor trades comparatively expensively by way of EV/Gross Profit. However, Opendoor is rising at a fast tempo, so a better a number of is affordable. I’ve additionally included Carvana (CVNA) because it has the same enterprise mannequin to Opendoor (however for vehicles). Given its monopoly standing and excessive development price, I consider Opendoor is buying and selling cheaply at $8 a share.

Some may additionally evaluate Opendoor to Amazon (AMZN), as additionally it is a low-margin enterprise, first-mover, and is just about a monopoly as nicely (40% market share within the e-commerce trade). Not together with the Tech Bubble of 2000, Amazon has traded at an EV/Sales a number of of lower than 5.0x over the previous 20 years. The lowest level was 0.8x, near the place Opendoor is buying and selling at the moment. Despite minimal a number of enlargement, Amazon’s share value has returned greater than 1,500x for shareholders.

Amazon valuation

Source: YCharts

While the inventory is promoting off, many institutional buyers are piling onto Opendoor. While retail buyers are dumping shares, good cash is accumulating at these ranges.

Opendoor institutional ownership

Source: Fintel

Management additionally launched its proxy assertion a couple of days in the past, highlighting CEO Eric Wu’s compensation bundle. As proven under, Wu’s fairness awards are divided into 6 milestones which vest upon reaching a sure value hurdle. The highest milestone is $67, which is sort of 10x from at the moment’s value. This not solely reveals that administration is aligned with shareholders, however they’re additionally in it for the lengthy recreation.

Eric Wu compensation package

Source: Opendoor FY2021 Proxy Statement

Catalysts

Expand Ancillary Services

Opendoor goals to offer an end-to-end expertise for all issues home-related. That means integrating ancillary providers on prime of its core house shopping for and promoting providers. Not just for their transferring journey but in addition for his or her residing journey. That is, offering providers after the shopper strikes in, equivalent to common upkeep and upgrades. As we have seen with Title and Escrow, incremental connect of latest providers won’t solely deliver higher-margin income for Opendoor but in addition solidify its place because the go-to, end-to-end house providers supplier.

Opendoor ancillary services

Source: Opendoor November 2020 Analyst Presentation

More Partnerships

This consists of house builders, REITs, banks, and so on. Furthermore, Opendoor may companion with web service suppliers, good house suppliers, furnishings corporations, and utility corporations (water, electrical, photo voltaic) so prospects can simply transfer in and have every part all arrange for them.

Market Expansion

Opendoor lately introduced its enlargement into San Francisco, New Jersey, and New York. These are among the busiest housing markets on the planet, so this can be a constructive improvement for the corporate. Opendoor additionally has eyes on worldwide enlargement because it readies for its Canada launch.

Opendoor Max

Not a lot data has been launched in regards to the Opendoor Max, which supplies real-time house worth. In the long run, I see Opendoor Max as a SaaS providing for people, brokers, and monetary establishments. This function is presently accessible in Phoenix, Arizona.

Opendoor Max app

Source: App Store

Risks

Regulation

Opendoor lately bumped into regulatory hassle with the North Carolina Real Estate Commission. Although regulatory pushbacks are half and parcel of working a disruptive enterprise, Opendoor might, occasionally, face dangers of suspension in sure markets.

Higher Interest Rates

Let’s face it. A high-interest price setting is just not good for any enterprise, not to mention a capital-intensive unprofitable actual property enterprise. For shoppers, mortgage fee prices will likely be larger, thus reducing demand. For Opendoor, it means a better price of capital to fund house acquisitions. As the price of debt rises, margins are more likely to be compressed as nicely.

To fight rising rates of interest Opendoor can “embed those costs in our offers” and “pass it on to the consumer.” In different phrases, Opendoor is more likely to increase Service Charge charges. In 2021, Opendoor has a vendor conversion price of over 35% when charging a 5% payment. Raising charges will certainly drop conversion charges however traditionally, Opendoor is ready to obtain conversion charges of 23% even at 10% charges.

Opendoor seller conversion

Source: Opendoor November 2020 Analyst Presentation

Housing Market Crash

This might be the most important bear thesis towards Opendoor given the present red-hot actual property market and its diminishing probability to maintain its pattern in a high-interest price setting. With 17,009 Homes in Inventory, a housing crash would imply a big stock write-off in addition to the potential to power the corporate to promote them at a loss.

During the Morgan Stanley TMT Broker Conference Call, an analyst requested about how Opendoor will develop and handle by a slowing housing market. This is Eric Wu’s response (emphasis added):

There’s 4 key factors I need to make.

One is that our properties are liquid listed belongings, which could be very totally different than a homebuilder or a REIT. And we maintain properties for about 100 days, of which 50 days of that’s beneath resell contract. That means now we have a purchaser, a deposit and a contract in place, proper? So 50 days of that’s on a resale contract. The different half is what you would possibly name an inventory publicity, proper?

And the second factor is that if you happen to examine the worst U.S. housing recession in historical past, which is the GFC or subprime disaster, the market moved a lot slower than folks understand. And so nationwide within the worst a part of the recession, the costs moved a detrimental 2.8%. And clearly, our publicity is 50 days, however that is nicely inside our margin of error vis-a-vis our contribution margin of 4% to six%. And so if you happen to run the enterprise mannequin by the worst recession in U.S. historical past, we’d nonetheless have constructive contribution margin.

The third piece of that–that is assuming we do not know that there is a recession. So the third piece of that we have invested closely within the information assortment right here. So we’re monitoring in real-time demand indicators, each of our properties, visits, in addition to market properties, clearance charges and what’s occurring in market, mortgage purposes, all the demand indicators, then the type of pricing. So there’s by no means a disconnect between what we view with provide aspect pricing and demand aspect. And so we’re monitoring the info very carefully, and we’re updating costs in actual time.

And then the fourth is absolutely the debt construction. We have $11 billion of borrowing capability, dedicated nonrecourse. If there is a dislocation, this offers us an amazing quantity of dry powder to truly capitalize on a dislocation.

On liquidity, Opendoor focuses on high-velocity, short-duration, and sale-ready belongings, thereby limiting lengthy intervals of holding stock. Opendoor is a market maker that gives liquidity for patrons, and the corporate is more likely to do nicely whatever the market setting, whether or not it is an up market, flat market, or down market.

On value motion, the residential actual property market strikes progressively, slightly than sharply, as proven under. As such, Opendoor won’t be closely affected by market drawdowns. If Opendoor has a mean stock holding interval of greater than a yr, then that is a distinct story.

Residential real estate prices move gradually

Source: Opendoor November 2020 Analyst Presentation

On information, Opendoor’s huge quantity of information and AI-powered pricing mannequin supplies dynamic, real-time presents. Speed. Flexibility. Accuracy.

On debt construction, Opendoor has entry to extra funds, which allows the corporate to purchase properties at low costs when individuals are panic promoting. Opendoor is just not a home-flipper, however opposite to in style perception, a housing crash is a internet profit for Opendoor.

Conclusion

In abstract, Opendoor goals to empower everybody with the liberty to maneuver by constructing a two-sided market for house consumers and sellers. Through its dynamic, AI-powered pricing mannequin, Opendoor presents comfort, simplicity, and certainty which shoppers have grown to like. It is working as a digital iBuying monopoly in a large trade with low know-how adoption, and the corporate is quickly taking market share.

Opendoor’s share value has bought off by greater than 70% from its November highs. The value is knocking on the doorways of each investor and this sort of alternative might not come knocking twice. The markets are in all probability too afraid of the truth that a housing crash will almost definitely dissolve Opendoor’s enterprise.

Well, for that matter, I’ll finish with one final chart. As you may see, home costs proceed to march ahead and upward, no matter how low or how excessive rates of interest have gone. The resiliency of residential actual property will likely be an automated tailwind for Opendoor.

Mortgage Rates vs Home Sale Prices

Source: FRED

Thank you for studying my Opendoor deep dive. If you loved the article, please let me know within the remark part down under. If there’s an organization that you desire to me to do a deep dive on, do not hesitate to share your ideas as nicely.

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