The iBuying business has come under a lot of fire over the past year after Zillow exited the market. Opendoor Technologies (OPEN -3.59%) has been hit hard as well, falling over 70% from its high in late 2021.
As fearful as investors are of the iBuying business today, there is still a large, long-term opportunity. And with a market cap of just $4.4 billion, Opendoor has the kind of upside that investors with a high risk tolerance should love.
Image source: Getty Images.
Opendoor has become a homebuying giant
Now that Zillow is out of the market, Opendoor is a go-to name in iBuying with $8.0 billion in revenue in 2021, up 211% from the previous year. The company generated $3.8 billion in revenue in the fourth quarter of the year and expects first-quarter 2022 revenue to fall in the range of $4.1 billion to $4.3 billion.
Investors shouldn't value Opendoor on a price-to-sales ratio, given that it records the full value of the home sale when a transaction happens, but this is a company that could generate tens of billions, if not hundreds of billions, of dollars in sales each year if it continues to grow. That's the kind of upside in scale that I like from an industry leader like Opendoor.
Management has guided for a long-term adjusted EBITDA margin of 4% to 6%, and Opendoor is progressing quickly toward that goal. After reporting a negative EBITDA margin of 3.8% in 2020, that number turned positive for the first time last year at 0.7%.
With a long-term revenue target of $50 billion and a 5% margin, annual adjusted EBITDA would total $2.5 billion, compared to just $58 million in 2021. That long runway makes Opendoor's $4.4 billion market cap look extremely attractive.
Can Opendoor make money?
One of the differences between Zillow and Opendoor is that Opendoor hasn't been shy about wanting to make money on its home transactions. Zillow wanted to be a market maker in housing, but Opendoor wants to make a profit. Even before Zillow announced its decision to shut down its iBuying operation, its return on homes sold (as a percentage of revenue) was lagging Opendoor's corresponding return metric, the contribution margin:
| Q1 2021 | Q2 2021 | Q3 2021 | |
|---|---|---|---|
| Opendoor Technologies | 10.2% | 10.8% | 7.5% |
| Zillow | 5.5% | 5.8% | 2.4% |
Data source: company shareholder letters.
Profitability will be volatile -- fourth-quarter contribution margin declined to 4.0% -- but Opendoor has already delivered results within the range of its long-term contribution margin target of 7% to 9%. The company should enjoy increased leverage from greater scale on technology and sales costs over time.
The big competitor is gone
Another concern that's gone is competition. Opendoor and Zillow were at one time in competition to buy the same houses, but the latter is out of the market. There are still other iBuyers, including Offerpad and Redfin, but they aren't the potential behemoths Zillow was.
Offerpad only generated $2.1 billion in revenue in 2021, while Redfin's properties segment reported an even smaller $881 million.
With its biggest rival no longer in the picture, just as Opendoor begins to report positive adjusted EBITDA, the company is well-positioned to continue leading the industry.
If iBuying becomes a big business, Opendoor is positioned to win
I think there's a place in the market for iBuying. Selling homes is time consuming and costly, meaning sellers who value a fast, convenient deal are going to be interested in what Opendoor has to offer.
If the company can find a way to maintain its profit margins while growing its transactions, this could be a tremendous stock. Real estate transactions measure in the trillions of dollars, and even taking a small share of the market could mean significant growth in revenue and cash flow, giving this stock a lot of long-term potential.
