When Opendoor (OPEN 3.38%) went public on Dec. 21, 2020, many investors hailed it as the "Amazon (AMZN 3.43%) of real estate" because its online marketplace streamlined the home buying process by making instant cash offers for homes, repairing the properties, and relisting them for sale. About 90% of the deals on its platform were completed without real estate agents -- its buyers simply place bids on its marketplace instead of directly haggling with the sellers.
But since its market debut via a merger with a special purpose acquisition company (SPAC), Opendoor's stock has lost nearly 90% of its value. Amazon's stock only declined 14% during the same period. Let's see why the "Amazon of houses" underperformed the actual Amazon by such a wide margin, and if it will remain the weaker investment.
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Why did the bulls abandon Opendoor?
Opendoor's business thrives when the housing market is hot and interest rates are low. Its revenue fell 46% in 2020 as the pandemic disrupted the housing market, but soared 211% to $8.0 billion during the post-pandemic buying frenzy in new houses. Its total number of houses purchased skyrocketed 498% to 36,908 units in 2021.
But in 2022, inflation and rising interest rates quickly chilled the housing market. Its revenue rose 94% to $15.6 billion for the full year, but its number of purchased homes dipped 5% to 34,962 units. In the first half of 2023, its revenue plunged 45% year over year to $5.1 billion, and analysts are bracing for a 54% decline to $7.2 billion for the full year.
During its SPAC presentation in Sept. 2020, Opendoor claimed it could generate $9.8 billion in revenue in 2023. Missing that target suggests the company didn't even factor in the threat of rising interest rates in its bullish forecasts.
Meanwhile, Opendoor's costs are soaring because it's still buying and repairing a lot of houses. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin dropped from positive 0.7% in 2021 to negative 1.1% in 2022, then dipped to negative 10% in the first half of 2023. Analysts expect its adjusted EBITDA margin to drop to negative 8.8% for the full year, which also misses its pre-merger target for a positive adjusted EBITDA margin of 0.1% in 2023.
As Opendoor's slowdown deepens, it's reaching out to lower-cost partners (including home builders, agents, and online real estate platforms like Zillow (ZG 1.70%)) to attract more sellers. But its partnership with Zillow actually opens up its platform to real estate agents -- which seemingly contradicts its original vision for relying on fewer agents.
Opendoor's stock might seem cheap right now at 0.5 times this year's sales, but its declining sales, shriveling margins, broken promises, and murky plans for the future all suggest it deserves that discount.
Are Amazon's prospects finally brightening?
Amazon experienced a growth spurt during the pandemic as more people shopped online and companies upgraded their cloud services. That's why its revenue rose 38% in 2020 and grew another 22% to $469.8 billion in 2021.
Unfortunately, inflation, rising rates, and other macro headwinds generated fierce headwinds for Amazon in 2022. Its e-commerce sales cooled off, its cloud customers reined in their spending on software upgrades, and its revenue only grew 9% to $514 billion for the full year. Its shriveling investment in Rivian Automotive (RIVN 6.10%) also caused it to post a net loss of $2.7 billion in 2022, which was a steep drop from its net profit of $33.4 billion in 2021.
That slowdown spooked the bulls, but Amazon's revenue rose 10% year over year to $261.7 billion in the first half of 2023 as its e-commerce and cloud segments stabilized. Its Amazon Web Services (AWS) cloud platform also remains the world's largest cloud infrastructure platform with a 32% market share in the first quarter, according to Canalys, which gives it tremendous scale and pricing power in that crowded market.
Amazon generated a net profit of $9.9 billion in the first half as it lapped its losses from Rivian and expanded its higher-margin cloud and advertising businesses. Its first-half operating margin also rose year over year from 2.9% to 4.8%.
Analysts expect Amazon's revenue to rise 10% to $567.5 billion for the full year as it turns profitable again. They also expect its growth to accelerate next year as the macro environment finally improves. It might not seem like a bargain at 42 times forward earnings (due to its recent earnings decline), but it still arguably looks cheap at 2.5 times this year's sales.
The obvious winner: Amazon
It's easy to see why Amazon outperformed Opendoor by such a wide margin in the past, and why it should remain the better investment for the foreseeable future. Amazon is still a bellwether of the e-commerce and cloud markets, and its recent problems are mostly cyclical instead of existential. Opendoor's approach to selling real estate is innovative, but it hasn't proven it can survive and keep growing in a high-interest rate environment.
