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Why I'm Not Buying Shares of Opendoor Technologies... Yet

By Nicholas Rossolillo - Jan 12, 2021 at 12:30PM

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By providing liquidity to the real estate market, this company could be on its way to earning a huge chunk of a multi-trillion dollar industry.

There's plenty of optimism surrounding Opendoor Technologies ( OPEN 6.56% ). Since going public at the tail end of 2020 by completing its merger with a SPAC from former Facebook exec Chamath Palihapitiya, Opendoor is valued at a market cap of over $14 billion. That's nearly double the value of fellow real estate technologist Redfin ( RDFN 5.14% ), and nearly half the value of real estate tech leader Zillow Group ( Z 0.78% ).

And this is still a small company that could have lots of upside remaining in the decade ahead. Opendoor is helping to pioneer a new category in residential real estate, with millions of homes sold every year up for grabs.

But I don't think Opendoor is the best buy in this emerging market -- at this juncture.

A home with for sale sign in front of it. A "sold" sticker has been placed on top of the sign.

Image source: Getty Images.

A promising disruptor of the real estate status quo

That is not to say Opendoor isn't on my watchlist. The company built software that makes selling a home a cinch, and the added ease of liquidating a property is sure to attract lots of homeowner attention. Sellers can choose to accept a cash offer and sell directly to Opendoor, in which case the company makes money by buying the home for a 5% fee, completing any repairs after the purchase, and then reselling the home at a higher price later, or they can opt to list the home for sale the more traditional way via Opendoor's platform for a flat 5% of the home value. Buyers can also browse the company's inventory and make home purchases. 

Opendoor's tech reduces the complexity inherent in completing a real estate transaction by virtually handling the legwork for consumers. The need for agents is eliminated, as are open houses, property showings, and extensive repair work prior to closing (if sellers choose to sell directly to Opendoor for cash). The simplified process also reduces costs from as much as 12% of a home's value to as little as 5%.

Much like Zillow's "Zestimate" tool, Opendoor relies on data to make accurate assessments of home values, and thinks it can begin to turn a profit on its low-fee platform within the next few years thanks to its efficient software. 2020 has, unsurprisingly, been a speed bump, with 9,064 homes sold through the first nine months of the year, compared to 13,768 during the same period in 2019.

But with a residential real estate market share of just 2% in the 21 cities it currently operates in -- and plans to expand into 100 cities in the U.S. -- there's plenty of room for growth. Using 2019 figures, there's some $1.3 trillion in annual home sale value up for grabs, not to mention adjacent services like title and escrow the company recently launched.

Not the best buy in real estate tech right now

Given the huge potential to disrupt the currently complex and expensive process of selling or buying a home, Opendoor is indeed an intriguing company. But I'm not buying the stock -- at least not right now.

The reason is that while Opendoor is the leader in simple-to-use cash-offer real estate services in the cities it currently operates in, it isn't alone in pioneering real estate transactions like this. Both Zillow and Redfin do the same things, and are also rapidly expanding. In fact, while the last year has had plenty of challenges, Zillow and Redfin actually grew, while Opendoor shrank.

Company

Revenue First Nine Months of 2020

YOY Change

Opendoor

$2.33 billion

(33%)

Zillow

$2.55 billion

42%

Redfin

$642 million

17%

Data source: Opendoor, Zillow, and Redfin.

Zillow and Redfin are also profitable. The incumbents earn revenue via agent fees and other mortgage services, in addition to their growing presences in the cash-offer direct-buy space -- compared to Opendoor, which is almost completely reliant on the new model and has yet to reach a profitable scale. Selling a home from its inventory counts as revenue, but gross profit (the difference between the sale price and what was paid for the home) is actually a better metric for Opendoor given its different business model, rather than the service fee used for Zillow and Redfin. Opendoor's adjusted gross profit was $173 million through the first nine months of 2020. That compares to $152 million in gross profit for the smaller tech-enhanced real estate agent services at Redfin.

All of this is to say I'm passing on Opendoor at the moment. Redfin looks like the best value among these real estate tech names, and I think it will outperform its peers. Nevertheless, the long-term potential is there for all three of these companies as they simplify the way homes are bought and sold. Opendoor and its financial technology platform thus deserves to at least be on your watchlist. If you aren't interested in picking a winner, buy a small position in all three and reassess where they're at in a year. But valued at over $14 billion, I think Opendoor's stock has risen too far, too fast.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Opendoor Technologies Inc. Stock Quote
Opendoor Technologies Inc.
OPEN
$14.94 (6.56%) $0.92
Zillow Group, Inc. Stock Quote
Zillow Group, Inc.
Z
$60.86 (0.78%) $0.47
Redfin Corporation Stock Quote
Redfin Corporation
RDFN
$40.29 (5.14%) $1.97

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