According to Zillow, U.S. residential real estate is worth an estimated $43 trillion, making it one of the most extensive parts of the economy. It's also historically been slow-moving and resistant to change, and the process for buying a home is essentially the same as decades ago.
Real estate technology company Opendoor Technologies (OPEN -3.59%) is trying to change that. Its "iBuying" business gives homeowners cash offers for their homes, which it then resells on the market. The goal? To provide a fluid, convenient, and fast process for anyone buying and selling a house.
The market hasn't been quick to embrace Opendoor; the stock went public in late 2020, and is down more than 60% over the past twelve months. However, I think there's ample evidence why Opendoor could be a long-term winner, so here are five reasons the stock is a screaming buy today.
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1. Smashing guidance
Aside from trying to execute a bold business idea, Opendoor went public through a SPAC merger instead of an IPO, which the market may be holding against the stock. Many "SPAC stocks" from 2020 and 2021 have disappointed investors with subpar performance, often missing financial projections they presented before going public.
Opendoor's performance has been anything but disappointing. Its pre-SPAC merger presentation called for $3.5 billion in revenue in 2021, but actual revenue trounced it, coming in at $8 billion, more than double its estimate. The company is about to report 2022 Q1 results, so investors will see if the strong performance continues. Management has guided for just over $4 billion in Q1 revenue.
2. Less competition
Competition is a drag on just about any investment thesis, but Opendoor's largest competitor Zillow dropped out of the iBuying space in late 2021 because it struggled to price the homes it acquired accurately.
Opendoor's closest remaining iBuying competitor is Offerpad, which does just a fraction of the transaction volume that Opendoor does. In other words, if the iBuyer business model proves successful over the long term, Opendoor will have an enormous lead on existing and future competitors, giving it a shot to become the overwhelming market leader.
3. Financials improving with growth
Opendoor isn't profitable yet, and the financials of iBuying are arguably the market's most significant question mark about the business. Opendoor will need to consistently show a profit to be a successful investment, but the company is making progress.
On a non-GAAP basis, Opendoor's EBITDA (earnings before interest, taxes, deprecation, and amortization) margin has improved steadily from negative 8% in 2017 to positive 0.7% in 2021. This must continue to improve as revenue grows, so this isn't a "sure thing." Still, the trend is going in the right direction.
4. Vast market opportunity
As mentioned earlier, the U.S. real estate market is worth trillions of dollars. It's an enormous opportunity with virtually open fields to growth if Opendoor can succeed over the long term.
Roughly six to seven million homes are sold in the United States each year, and Opendoor sold 21,725 in 2021. That's just 0.3% of the market. This is a big "if," but a successful Opendoor could someday be among the largest companies in the world because it operates in such a large market.
Opendoor is not only expanding in existing markets but is rapidly expanding how many cities it operates in. It was in 44 metropolitan markets at the end of 2021, and has opened up in the New York City/New Jersey metro areas and the San Francisco Bay areas so far in 2022.
5. Stock already priced for failure
I would understand the stock coming under pressure because Opendoor is a high-risk, high-reward investment, and the company is anything but a guarantee to succeed. However, the overall bear market among growth stocks has seemingly priced the stock like it will go bankrupt.
The stock currently carries a market cap of $4.4 billion; put another way, it's at a price-to-sales ratio of one, using guided 2022 first-quarter sales! Opendoor operates at single-digit gross profit margins, so it's unlikely ever to command a high P/S percentage, but less than one on annual sales? It seems to me that the negativity is a little extreme here.
But for patient investors, that means more upside if the company is successful to the point that the market changes its mind and awards the stock with a higher valuation. It seems that the company is doing all the right things, and as long as that continues, it could be a matter of when, not if. That is enough to make the stock a screaming buy, in my view.
