The concept of "iBuying," in which companies buy and sell homes to consumers, is becoming increasingly popular. Total iBuyer transactions topped 100,000 for the first time in 2021, a sign that consumers are increasingly receptive to selling their homes with the touch of a button.
Opendoor Technologies (OPEN -3.72%) is the leading company in the iBuyer industry, but the market remains unconvinced the business is sustainable as the stock is down nearly 70% over the past year. However, there's evidence Opendoor can succeed, including two eye-popping charts that illustrate just how well the stock could do over the long term if the company can execute.
Monitoring Opendoor's progress
The biggest concern about the iBuyer business model is whether or not it can be profitable. Indeed, Opendoor is not yet a profitable company. However, it's also very early in its growth story, so you need to look at trends to see where it could go in the future.
Image source: Getty Images.
Opendoor's business is highly capital-intensive. It spends a ton of money and takes on a lot of debt to move thousands of homes on and off its balance sheet. The company points to non-GAAP (adjusted) earnings before interest, taxes, depreciation, and amortization (EBITDA) to track the core business's profitability.
As a percentage of revenue (margin), non-GAAP (adjusted) EBITDA has steadily progressed from negative 8.0% in 2017 to positive 0.7% in 2021. While the company's net income is still negative, this clear progress should at least give investors hope the business can continue working toward showing a bottom-line profit as it continually buys and sells more homes.
Eye-popping chart #1
If iBuying works, the potential upside for the stocks involved could be tremendous. There is virtually an unlimited runway for a company like Opendoor to grow. It sold 21,725 homes in 2021, but millions of homes are sold in the United States each year. The chart below shows that roughly 6.5 million existing homes have changed owners over the past year, while more than 1.6 million new houses added to the market's supply.
Data by YCharts.
In other words, Opendoor has a roughly 0.3% market share of U.S. home sales. That share should increase now that its largest competitor, Zillow, quit the iBuying business in 2021, which frees Opendoor to expand its leadership position over the coming quarters and years.
Eye-popping chart #2
Of course, it's no sure-thing that Opendoor's business model works over the long term. It's fair to acknowledge risks like rising interest rates making the company's debt more expensive or a potential decline in home prices impacting its profit margins.
However, I would argue Opendoor is trying to be a transaction company instead of a "home flipper." It charges a 5% fee when you sell to them, cutting out the real estate agent and providing a quick and straightforward selling experience. Ideally, Opendoor is profitable on that service charge plus any higher-margin complementary services it may add over time like renovations or financing.
Opendoor stock has been beaten down during this marketwide sell-off of high-growth and tech stocks, falling 70% over the past year while revenue continues to climb, growing 211% to $8.0 billion in 2021.
Data by YCharts.
The above chart shows what that pace of top-line growth has done to the stock's valuation, shrinking the price-to-sales ratio (P/S) to just under 0.3. Opendoor's capital-intensive business warrants a conservative valuation, but going to a P/S ratio of one would move the stock to three times its current value because of its recent growth.
Investor takeaway
Is Opendoor guaranteed to succeed? Of course not. However, the stock seems priced to reflect all of the potential negative outcomes and none of the positive upside. The cheap valuation leaves plenty of room for Opendoor's growth to become better reflected in the stock price over the coming years, and in the massive housing industry, there's plenty of room for growth.
