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My Favorite 10-Bagger Stock for 2022

By Justin Pope – Dec 18, 2021 at 8:10AM

Key Points

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Growth, value, and opportunity combine to create a genuinely compelling investment idea.

Things are getting a little scary for some investors right now as rising inflation concerns also lead to a rise in market volatility. But the fears this volatility is causing for some is creating excitement for others who see this as an opportunity to buy stock in great companies at reduced prices. A glance at the market shows many high-quality growth stocks are trading at bargain levels, well off their highs.

Buying at bargain prices greatly increases the chances of buying a stock that can generate 10-bagger returns over time. In 2022, my favorite 10-bagger stock idea is real estate tech company Opendoor Technologies (OPEN 7.98%). Let's take a closer look at this company and why I think it has such strong growth potential in the coming year.

A family stands on the front lawn of a home next to a home sold sign and looks at the house

Image source: Getty Images.

Land and expand at full speed

If you are new to Opendoor's business model, it relates to a concept the company refers to as iBuying, which it says is different from house flipping. The iBuyer is a market-maker of sorts, focused on owning the transaction. It focuses on buying homes it considers to already be in good condition and charges a 5% fee for helping the seller expedite the transaction. Since most home sales involve an average of 6% in fees to the selling and buying Realtors involved, can get somewhat complicated, and often take longer than expected, Opendoor's model saves the seller some money. Opendoor makes its profits from having the expertise in place to handle the transaction quickly and more efficiently.

Three primary companies have been involved in iBuying, including Opendoor, Zillow (ZG 3.63%) NASDAQ: Z), and OfferPad (OPAD 9.38%). Each company used a different strategy to enter the market, with mixed success:

  • Zillow took a fast approach, acquiring lots of homes as quickly as it could. However, it couldn't accurately price the homes it was buying, and lost money on many of its transactions. It quit iBuying altogether last month as losses began to mount and still has about 9,000 homes on its books.
  • Offerpad has taken a much slower approach to the process, carefully picking what houses it wants to acquire to make sure it can profit from reselling them. Zillow and Offerpad had roughly the same number of homes for sale in March of this year, but Zillow had three times as many homes by November.

Opendoor's approach to the market has fallen somewhere in between. It has by far the most homes available for sale, currently 4,378 to Offerpad's 1,184. What's important is that Opendoor isn't growing recklessly.

OPEN Gross Profit (Quarterly) Chart

OPEN Gross Profit (Quarterly) data by YCharts

We can see that Zillow's gross profits declined the deeper it got into iBuying, while Opendoor has seen gross profits increase. Opendoor's advantage in balancing growth and increasing gross profits could be what eventually makes it the runaway leader in iBuying.

Growth with no glass ceiling

Now that we know what separates Opendoor from its competitors, let's focus on putting numbers to the stock's potential opportunity.

Amazon has been such an excellent investment because it dominates a massive market (retail) with nearly endless room for growth. Few industries can match the vast size of retail, but real estate is one I would argue can. In the United States alone, there are more than 7 million home sales forecasted for 2021. Opendoor has sold 11,931 homes through the first three quarters of 2021, generating $4.2 billion in revenue. That $4.2 billion in revenue came from just 0.16% of the U.S. housing market. Imagine the revenue possibilities from capturing just 1% of the market.

In the third quarter of 2021, Opendoor acquired 15,181 homes, more than it sold the prior three quarters. It recently opened up $9 billion in liquidity, enough capital to acquire about 25,000 homes based on the company's average value on homes acquisitions, $365,000.

At its current expansion rate, it seems reasonable that Opendoor could be doing 100,000 transactions per year within five years (it acquired about 26,000 homes over just the past nine months). Using the average sale price from sales in the first three quarters of 2021, 100,000 home sales would translate to roughly $35.2 billion in revenue. And that would still be just 1.4% of homes sold each year in the U.S. Opendoor is also preparing to expand into Canada and is exploring accessory services it might want to launch in the years to come (moving services, renovating, etc.). So the potential for sizeable growth is there.

Valuation magnifies the upside

What creates the 10-bagger potential here is a valuation that could further amplify investor returns. Opendoor's stock price has declined along with other high-growth stocks caught up in the volatility of 2021 and because of the news over Zillow getting out of this part of the market. Shares now trade around $13, a whopping 66% off 52-week highs.

With a market cap of $8.1 billion, Opendoor is a tiny stock considering its growth potential. Analysts estimate 2022 revenue at $15 billion, so the stock is trading at a price-to-sales ratio (P/S) of just over 0.5. Opendoor needs to invest large amounts of money to buy houses, which might make it worthy of a lower valuation. However, the stock seems priced for an absolute worst-case scenario, like a housing crisis or a huge jump in mortgage rate costs.

Doom is always possible, but I think there is a lot of "doom and gloom" priced into the stock at this point. If Opendoor recovers to a P/S ratio of 2 and hits next year's revenue estimate, the resulting $30 billion market cap is nearly a four-bagger from today's prices. If the company hits the $35 billion we calculated earlier and trades at the same P/S ratio, the resulting $70 billion in market cap would produce roughly a nine-bagger.

Ultimately, we cannot predict the future, and Opendoor may exceed or fall short of the plan laid out here today. But when I consider the potential upside that comes with nearly endless growth opportunities and a dirt-cheap valuation, Opendoor is at the top of my 2022 list of potential stocks with 10-bagger potential.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Justin Pope owns Opendoor Technologies Inc. The Motley Fool owns and recommends Amazon, Opendoor Technologies Inc., Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends Offerpad Solutions Inc and recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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