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Here's 1 Stock With 10X Potential I Just Bought

By Matthew Frankel, CFP® and Brian Feroldi – Sep 30, 2021 at 11:45AM

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I see a bright future for this real estate disruptor.

The iBuying business is ramping up, and the way we buy and sell houses could look very different in the future. That's where recently public company Offerpad (OPAD 0.36%) comes in. In this Fool Live video clip, recorded on Sept. 16, Fool.com contributor Matt Frankel, CFP, discusses with colleague Brian Feroldi why he recently added shares of Offerpad to his portfolio. 

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Matt Frankel: Ticker symbol is OPAD recently went public through SPAC because it's 2021. Why not. Year of the SPAC. This is the newest company to go public in the field of iBuying. If you're not familiar, iBuying is a business model where a company will buy minor tweaks to it and then resell it hopefully at a profit. Now, I bought the stock about a week ago. I do not normally try to time the market, but I couldn't have time this one much better. Let me show you this. This is the past week. Offerpad's up 38% today alone, and up 64% over the past week.

Brian Feroldi: It's up 50% today.

Frankel: Went up even more since I was talking about it, that's big day today. The news today isn't that big. The big news is that they got a new credit facilities, through JPMorgan Chase for $300 million. Buying homes cost money. It's a big stretch to buy one house. Imagine if you're trying to buy 6,000 in a year, like Offerpad is trying to do. You need to access the capital. They got about $300 million in the SPAC deal. That's less than they had planned on getting, which means a lot of people redeemed their shares. They're kicking themselves today for doing that.

Now, they have another $300 million to work on. They have about $300 million in cash on their balance sheet, and $300 million plus a $100 million accordion feature on that new credit line today. That's why you're seeing the market really reacted positively. To be fair, it's going a little meme-stock-ish at this point in the past couple of days. There was a few days before I bought it, it rallied from $10-$16 and then down to $8 in one day. That's pretty meme-stock-ish if you ask me.

But long-term, this is a really high potential business. The customers really love what they're doing. I have a more aggressive view on iBuying than a lot of my colleagues do. I think within 20 years, this is going to be how we buy and sell houses in America, period. Full stop. It eliminates so many of the pain points from buying and selling homes. I don't know if either of you have sold a home recently. It's not fun. Even in a good real estate market, it is not fun. You have open houses, you have people coming and going inside your house. When I sold one house, the realtor wanted me to put half of our possessions in a storage unit to make a house look a little less full. There's a lot of consumer pain points, engineered negotiations going back and forth, staging the house. I could go on. It's not a fun process.

If iBuying can get it right, and that's a big if at this point, which I will get into in a second, this is a massive market opportunity. There are six million homes sold every year in the U.S. in a typical year for roughly $2 trillion. That was before the real estate price gains we've seen in the past year. Big market opportunity. Ibuying is starting to really catch on. A recent report by Zillow which has an iBuying division itself, said that the entire iBuying industry bought 15,000 homes in the second quarter. That's an all-time record for the iBuying market. That's a 1% share of the market. This is the first-time iBuying has ever cracked a 1% market share, so big opportunity.

What I really think is ultimately going to happen, there's room for many winners in a $2 trillion market by the way. What I think is ultimately going to happen is the iBuying industry is going to hit some a network effect. Think of why both of you were on Facebook. It's probably because at some point, aging myself a little bit here, a bunch of your friends were on Facebook and said it was better than Myspace, and you probably joined for that reason. A similar thing can happen here. A Net Promoter Score of 81 percent, 95% customer satisfaction. Nine out of ten would recommend it to a friend when selling their house. At some point, people are going to say, this person use an iBuyer, and this open house I'm doing really sucks. Why wouldn't I try this method?

The challenge is getting the pricing right. The biggest complaint analysts say when it comes to investing in iBuying companies, Zillow, Redfin and Opendoor are the other big ones, there's like the big four, is no one's really figured out how to do it consistently profitable yet. It's valuing homes algorithmically is very tough. If you've ever check the Zestimate on your house on Zillow, you know it's not perfect and they are the best at it. It's a very tricky thing to do. Whatever company can really nail the pricing of a home and figure out how to be efficient when it comes to renovating and selling the house is a ton of potential here.

Offerpad seems to be the only one that is really focused on efficiency at this point. Zillow has its core business, so they don't really care how profitable the iBuying businesses right now as long as it's growing. Same with Redfin, they've the core brokerage business. They don't really care. Opendoor got something like $2 billion from their SPAC deal. They have tons of cash, don't really have to worry about making a profit. Offerpad, I interviewed their CEO a few weeks ago and he said they are the only one that is laser-focused on profitability. They've proven that they have the most efficient model.

Over $31,000 contribution profit per home, meaning after carrying costs and stuff like that is more than Zillow is making by the way. They were profitable in the second quarter. That's a word that iBuying has not heard yet. They actually had a profitable second quarter. They're not going to be consistently profitable. They're expecting to lose money as they start to grow a little bit faster. But they are still only in 19 markets around the country, planning to sell about 6,000 houses this year that would give them about a 10% share of the iBuying business. One that I bought about a week ago, it's up big since still worth less than $4 billion, the market cap is about $3.9 billion. Actually, it's probably more if Brian said it's up 50% now. A little over $4 billion, let's say. But this is a company with like an Amazon size market opportunity and only four serious competitors in the space. It's by far the lowest valued and most efficient of the four businesses. This is one that I'm really positive on.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Matthew Frankel, CFP owns shares of Offerpad Solutions Inc and Zillow Group (C shares). The Motley Fool owns shares of and recommends Amazon, Facebook, Opendoor Technologies Inc., Redfin, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, short January 2022 $1,940 calls on Amazon, and short September 2021 $65 calls on Redfin. The Motley Fool has a disclosure policy.

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