Real estate iBuying company Opendoor Technologies (OPEN -8.44%) has been executing at a high level in the three quarters since coming public via a special purpose acquisition company (SPAC) merger. In a race to disrupt residential real estate, one of the largest markets in the world, Opendoor's long-term potential could bring big returns for patient investors.
Despite the upside, the market hasn't yet appreciated Opendoor's accomplishments; the stock is down more than 50% from its highs. There are three important clues that Opendoor could be a compelling investment idea for bold investors.
1. Opendoor is winning the iBuying battle
The traditional home-buying process in the United States is slow and handled by multiple parties, including agents, lawyers, inspectors, and bankers. This creates a lot of back and forth paperwork and drags the process out to more than 30 days, on average.
Opendoor pioneered the concept of "iBuying," where the buying and selling of a house are digitized, and a company like Opendoor works directly with sellers to provide them with a cash offer and a digital closing process. The company then resells the house on the market. The iBuying process cuts out agents and some of the fees associated with traditional closings, such as agent commissions. Opendoor then resells the house on the market and charges a service fee of up to 5% on the transaction.
After seeing Opendoor steadily grow with its iBuying concept, competitors have also begun to offer iBuying services, including Zillow Group and Offerpad. Because of how capital intensive the business is (a lot of money is needed to buy and sell thousands of houses) and how price competitive the housing market is, these companies are racing to get as big as possible. As the companies buy and sell more homes, they have the ability to become more profitable by leveraging outsourced contractors to save money, and its pricing algorithm improves as it sees more transactions.
According to iBuyerStats, a website dedicated to tracking the competitors found in iBuying, Opendoor has consistently had the most housing inventory available for sale. It currently has roughly 3,300 houses for sale, 53% more than Zillow and more than four times as many as Offerpad.
2. Revenue growth is ahead of schedule
When companies go public via SPAC merger, they lay out a public presentation of their business, often including long-term growth projections. Opendoor laid out its pre-merger investor presentation about a year ago, in September 2020.
Fast forward to the company's recent 2021 Q2 earnings call. CEO and founder Eric Wu said on the earnings call, "... based on our current progress, our second half revenue run rate is on track to exceed our 2023 target, a full two years ahead of plan."
In other words, if Opendoor were to operate for 12 months at the level the business currently is, it would surpass the $9.8 billion in revenue it projected for 2023. This is an underlooked point because if Opendoor is already two years ahead of its original growth curve, where will it be by 2023? Sure, a dip in the housing market or other events could disrupt the company's speed of growth, but Opendoor is showing the world that the business is operating at a high level.
3. SPACs are out of favor with the market... opportunity?
Investors have overlooked this strong performance, focusing instead on the fact that Opendoor joined the public market via SPAC merger. It has hardly mattered what operating results or earnings have looked like for former SPACs; the stock market has been selling off virtually all SPAC-based stocks for several months now.
Investors have been spooked by a handful of "bad apple" companies turning up fraudulent, and other companies have wildly missed on the projections they made before going public. These instances have burned those involved, and investors have taken a much more cautious attitude toward SPACs as a whole.
But if companies like Opendoor keep blowing away estimates, the market is likely to come around eventually. When it does, the stock price could move aggressively. If we take Eric Wu's comments about revenue and assume that Opendoor does sales of $10 billion in 2022 (in other words, Opendoor stops growing and maintains its current pace over the following year), the stock currently trades at a price-to-sales (P/S) ratio of just 1.0. That's a bargain-bin valuation.
Competitor Zillow Group trades at a P/S ratio of more than 3, reflecting Opendoor's discount as a former SPAC.
Here's the bottom line
Real estate is a huge market, and it's a complicated industry because of the clash between traditional agents and the "new kids" on the block trying to bring technology into homebuying. It's too early to say that Opendoor will become the "Amazon" of home buying, but what seems certain is that the company is poised to be a big player in real estate's future if it keeps performing like this.