Buying and selling a home is the largest transaction most people will make in their lifetimes. But the process of homebuying hasn't changed much over the years. Those days might be coming to an end, as real estate technology company Opendoor Technologies (OPEN 2.77%) is setting out to remake homebuying into a digital experience. Here are three reasons why Opendoor has the potential to produce life-changing returns for investors.
1. Disrupting the real estate market
Homebuying hasn't changed much over the years; a typical transaction has a buyer and a seller. The process is brought along by numerous parties, including agents, lawyers, bankers, and inspectors -- all of whom take their "pound of flesh" along the way.
A home seller can expect to pay up to 11% of a home's value in fees for agent commissions, staging, and seller concessions. Meanwhile, buyers can pay 2% to 5% of a home's value for closing costs, more if moving and furnishing services are needed.
Image source: Getty Images.
The total transaction takes 30 to 45 days on average to close in the United States, and the process isn't delightful. A 2018 study concluded that 38% of first-time buyers thought the homebuying process took too long, and 40% said it was the most stressful event in their life.
Opendoor is building a digital home buying process that cuts out the real estate agent, streamlining the process to something closer resembling online shopping, and saves the seller money because there are lower commissions to pay. Home selling and buying take place on Opendoor's website or mobile app, where sellers can facilitate an offer for their house from Opendoor through their smartphone. Sellers accepting an offer from Opendoor will leave their keys for the company, which will take care of repairs, prepping, and reselling your home.
Sellers can get an offer within 24 hours, and closing can take less than a month. Opendoor charges a service fee of up to 5%, and will price in the cost of any needed repairs when reselling, saving the seller money, time, and energy. According to CEO/founder Eric Wu, the company's net promoter score, which indicates how likely a consumer is to recommend a brand to another, is 80 out of 100, signaling that sellers are enjoying working with Opendoor.
2. Strong operational momentum with room to grow
The company just reported its 2021 Q2 earnings, and the business is operating with strong momentum. Opendoor is rapidly expanding into new markets, opening on a city-by-city basis to keep pace with competitor Zillow, which is known across the country. Opendoor opened 12 new markets in Q2, and the business now serves 41 markets in the United States.
Opendoor also bought a record 8,494 homes during the quarter, a massive jump from the 3,594 it bought in the previous three months. This resulted in revenue growing 60% year over year to $1.2 billion. Management expects the business to generate $1.8 billion to $1.9 billion in revenue in the third quarter, a nearly 60% increase from the current quarter.
Approximately 6.5 million homes sold in the U.S. in 2020, and Opendoor's 8,494 acquired homes during the quarter shows how small its presence still is in a huge addressable market. Management has a long-term goal of crossing $50 billion in revenue as the company continues to enter and expand in new cities.
It's fair to wonder how Opendoor will fair when the housing market eventually "cools off", and it's not so easy to move housing inventory. Opendoor has spent years working on its pricing models and believes it can thrive in any market environment. CFO Carrie Wheeler said this during the company's Q2 call:
"Our proprietary pricing capabilities allow us to optimize our acquisition and resale strategies, and be a market-maker across all market conditions."
Additionally, Opendoor has approximately $1.5 billion in cash and equivalents on its balance sheet, so the company has some liquidity to absorb unexpected volatility in the housing market. During the beginning of Covid in 2020, Opendoor moved quickly to cut costs and halted homebuying, showing that management is willing to act in order to protect the company during times of crisis. Opendoor cannot completely eliminate risk from housing market volatility, but it has shown that it's equipped to adjust when needed.
3. The path to $1 million?
The stock trades at a market cap of almost $10 billion and a price-to-sales ratio of 2 based on expected 2021 revenue of $5 billion. Opendoor operates a very price-competitive business that requires a lot of spending to acquire housing inventory, so the stock is likely to remain at a lower P/S ratio than most other businesses with similar revenue growth.
If Opendoor reaches its long-term revenue goal of $50 billion, the same P/S ratio will value the company at $100 billion, a tenfold increase from where it is now. The company is guiding for a positive EBITDA of $15 million to $25 million in Q3, and Opendoor could become increasingly profitable as it gets larger and revenue growth continues to outrun costs. If Opendoor continues expanding, adding services, and entering new markets, it's possible that it could someday surpass this $50 billion revenue milestone. It only needs a 4% share of home sales in the U.S. to meet this mark.
If Opendoor continues to grow, execute, and eventually establishes itself as the "face" of digital home buying, investors could be inclined to reward the stock with a higher valuation. For example, competitor Zillow current has a P/S ratio of just under 4, and that's after the stock has already declined 50% from highs. If Opendoor was awarded that valuation, the resulting market cap of $200 billion, based on $50 billion in revenue would create a 20-fold upside from the current stock price. A $50,000 investment would appreciate to $1 million. This would take many years of course, but the long-term path to growth is there.
The bottom line
Opendoor is a pioneer of the digital home buying process and aggressively expands to fight for market share. If the company keeps performing as it did in Q2, investors could be looking at the beginning of a very long growth story.
