True "unicorn" investments don't happen every day, but they do come along now and then. Companies like Amazon and Tesla both brought a new approach to a vast, stagnant industry; both faced skeptics and ended up creating tremendous wealth for the investors who believed when few others did.
It may be time to consider adding real estate company Opendoor Technologies (OPEN 2.77%) to this list of world-changing innovators. The company is pioneering the idea of iBuying, where companies use cash offers to buy and sell your house. However, real estate industry incumbent Zillow tried and failed to incorporate iBuying, which has investors doubting the likelihood that Opendoor will succeed, and selling its stock into the ground.
Early Amazon and Tesla investors retired rich because of their conviction in these early disruptive companies. If Opendoor can prove that its business model works, investors could be sipping Mai Tais on the beach a decade from now.
Image source: Getty Images.
Endless growth potential
When a homeowner sells to Opendoor, they pay a service charge, which is typically 5%. Opendoor then resells it on the open market. Think of the house like any product you buy at a store. A buyer pays Opendoor for the home, and Opendoor's gross profit on the transaction is the service charge plus or minus any difference between what Opendoor bought and resold it for.
So, Opendoor buys a house for $300K and resells it for $305K; the $305K is the revenue from the transaction, and Opendoor's gross profit is the service charge (5% of $300K) plus the additional $5K that the home appreciated.
Real estate is a remarkable industry for its size and complexity. A study by Zillow estimated that the total value of residential homes in the U.S. is more than $33 trillion. The cool part about the market is that it eventually turns over, because homes are sold repeatedly over their life span. Between 6 million and 7 million homes are sold in the U.S. each year. Opendoor sold 5,988 homes in its most recent quarter, 2021 Q3, or about 0.08% of the homes sold in a given year. Opendoor could virtually increase its business for the quarter tenfold and still would have penetrated less than 1% of the market that quarter. The company can buy more or less homes based on how the real estate market is doing, so the actual number of homes Opendoor buys can vary sequentially.
The company has also implied plans to grow through other means. Opendoor announced a few months ago that it's hiring in preparation to enter the Canadian market, which is worth another $6 trillion, according to Better Dwelling. Opendoor also plans on adding complementary services like title and escrow, financing, insurance, moving services, maintenance, and repairs. There are many ways that Opendoor can touch the homebuying and selling process that it hasn't even touched yet.
The only show in town
Until recently, the iBuying industry was a three-headed race that featured Opendoor, Zillow, and Offerpad. Zillow tried to grow its iBuying business very aggressively, but it failed to properly read the housing market; it overpaid for houses and then sold them at a loss. It decided to quit iBuying to protect its financials from further damage.
Here's the thing: iBuying is a tricky business because it requires a lot of capital (buying lots of homes) and dealing with low margins. An iBuyer needs to strike that balance between acquiring homes at a price that convinces an owner to sell to them and then having enough room to resell it at a small profit.
This chart shows that Opendoor's gross profit, which indicates its core ability to buy and resell houses, is growing with revenue, which is a good sign.
OPEN Revenue (TTM) data by YCharts
The overall company is not yet profitable. Its net income, which factors in marketing, administrative expenses, etc., was negative $17 million on an adjusted basis in 2021 Q3. However, if Opendoor continues growing its gross profit, it should eventually grow large enough that it covers these secondary costs and turns net income-positive.
It'll be a lot harder to dismiss the business model once it reaches that profit threshold, and with Zillow out of the game, Opendoor has this vast market primarily to itself. But what about a slow housing market? I would argue that a lack of buyers might make homeowners more willing to sell to Opendoor, just for convenience.
Skeptics pushing the stock down
Opendoor stock has fallen tremendously from its high of nearly $40 per share in early 2021, down nearly 70% over the past year. The company came public via a merger with a special purpose acquisition company (SPAC) and is trading at just under $9 per share, less than its SPAC price.
OPEN PS Ratio (Forward) data by YCharts
As the chart shows, the stock's forward price-to-sales ratio is just 0.358, which puts its valuation in between its competitors Zillow and Offerpad. It's fair to argue that it deserves a low valuation because its revenue comes at such a small margin, but I don't think investors are appreciating Opendoor's potential growth and leadership in the iBuying industry now that Zillow is out of the picture.
Analysts' estimates for next year call for 100% revenue growth to nearly $15 billion, which is far ahead of the projected $9.8 billion for 2023 the company set before going public. This optimism suggests the company is executing at a high level on its growth strategy.
With a market cap of less than $6 billion right now, the upside seems compelling. Suppose that the stock trades at a P/S of 1 over the long term as investors begin buying into the business model. If Opendoor were to average 40% revenue growth per year over the next decade, which I think is possible given the large runway to expand, its annual revenue would be roughly $433 billion. An equivalent market cap would mean the stock increased more than 70 times from its current size. If the P/S stayed as low as 0.5, its growth would still spell a 35 times increase in its current size.
Opendoor has risks, but any life-changing investment has a few of those at some point. Fortune sometimes favors the brave, and those who became rich from investing in Tesla and Amazon might vouch for that. If you can stomach the volatility, Opendoor investors might be enjoying similar success a decade from now.
