Real estate technology company Opendoor Technologies (OPEN -1.63%) is struggling to win over investors. Despite recently posting its first quarter with positive net income on a GAAP basis, the stock has remained down more than 50% since January.
Opendoor benefits from rapidly increasing home prices, making it easier to sell houses for more than they pay for them. I've heard skeptics argue against Opendoor, that the business model will collapse when the housing market cools off. But is this true? Opendoor's long-term future could be determined by whether the company can become more than a "flipper," which many currently see it as. Here's why Opendoor's business isn't designed around flipping at all -- and why investors shouldn't fear a downturn as a reason to avoid the stock.
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A bird in the hand is worth two in the bush
It's understandable to assume that if rising home prices benefit Opendoor, falling home prices would have the opposite effect. However, I don't think it's that simple. Opendoor is a marketplace that helps homeowners sell (and buy) a home, with a digital transaction that lets owners receive an offer and close the sale in days, not months.
In other words, customers may see Opendoor buying and selling homes, but it's really offering certainty and convenience underneath all of that. That's why Opendoor is generating a Net Promoter Score (NPS) above 80, which signals high customer satisfaction, offering a solution for a process that studies show is highly stressful to consumers.
You can also save money when selling to Opendoor because it cuts out the real estate agent, who typically commands a 6% commission. In contrast, Opendoor charges a 5% service fee plus any needed repairs. A pleasurable service for a stressful process that also saves you money seems pretty appealing.
Sellers seemingly agree; Opendoor states that its seller conversion is higher than 35%. Keep in mind that this is in a hot housing market, where you can list your home for sale, and buyers are fighting each other with above-list price offers. Wouldn't the certainty and convenience of Opendoor's business become more attractive to sellers if buyers evaporated? I would think so.
Housing falls in slow motion
You also need to consider the economics of falling home prices. Technically, if homes are falling in value, Opendoor is at risk of buying houses for a given price and potentially selling them at a loss. But the risk of that happening consistently looks overblown.
For starters, the increase in demand for Opendoor's iBuying services could give the company the ability to change its seller's fee to help make up for potential headwinds caused by falling home prices. The company charges 5% but has noted that conversion rates were strong in the past, including a 23% conversion when it charged 10%, double what it currently does. It's charging 5% today to grow as fast as possible, but in a "survival mode" type of event, Opendoor could raise its fee to curb losses.
Secondly, and perhaps more importantly, housing historically hasn't fallen very quickly. Housing "crashes" have always happened in "slow-motion;" the Great Financial Crisis in 2008-2009 created arguably the worst housing crash in U.S. history, but the sharpest quarterly decline in home prices was 3% during that time.
Opendoor has an estimated 35% of its inventory under contract at any given time and hasn't had more than 10% of its inventory sit on the market for more than 120 days since 2018. Would falling home prices negate the margin benefits that Opendoor enjoyed in its 2022 Q1, for example? Of course, but with rapidly turning inventory and housing's status as a traditionally stable asset class, a downturn in the housing market could be more a bump in the road than an existential crisis.
The bottom line
I believe Opendoor's desire to offer a quick and convenient selling experience for homeowners makes the company closer to a "market-maker" than a home-flipper. Opendoor may benefit from a hot market, but appreciating home prices is the cake's icing and not the main dessert. Opendoor is about selling as many houses as quickly as possible, generating its seller fee along the way.
Opendoor's long-term upside in a multitrillion-dollar housing market makes the stock worth taking a chance on. A housing downturn may wind up being the opportunity Opendoor needed to prove itself instead of the crisis some may think it is.
