Truly exceptional investments are created when a new solution comes to a large, antiquated industry and changes the game. Tesla electrified the automotive industry. Apple built an empire with the iPhone. These companies are rare, and the path to success always comes with hurdles and doubts.
An argument could be made that Opendoor Technologies (OPEN 3.38%) is similarly affecting the real estate industry. There aren't many industries that are more outdated than buying and selling homes. Opendoor's iBuying model gives a modern, e-commerce-like flare to a consumer's most significant and stressful lifetime purchase.
To be clear, the journey forward is full of risks, and success is anything but guaranteed for Opendoor. But given the potential upside, it makes a compelling long-term idea for the bold investor. Here is what you need to know.
Opendoor is back on its feet
For the uninitiated, Opendoor is a business that buys and resells homes. Its goal is to be a market maker, not a home flipper. Opendoor charges a small fee (typically 5%) on every transaction. While a flipper will buy an undervalued home, fix it up, and try and sell it for as much as possible. Its goal is to buy and resell as many homes as possible, collecting its 5% along the way.
Opendoor wants to sell speed and convenience. Working with Opendoor offers a cut-to-the-chase option for homeowners who don't want to go through haggling with potential buyers, open houses, and offers potentially falling through. Opendoor's fee is also less than what a typical selling agent charges (typically 6%).
That doesn't mean the housing market won't impact Opendoor's business; the company aims to anticipate potential market changes and factors that into offers. However, it's a misconception that Opendoor's business is built on rising home prices. It's a volume game about buying and selling with its capital repeatedly.
Business boomed between 2020 and 2022 as Opendoor leaned heavily into a strong market. The market zagged halfway through last year. Home prices deteriorated faster than Opendoor anticipated, leaving the company largely upside-down on over 14,000 homes (the 2022 second-quarter cohort).
Opendoor needed a year to off-load them, often losing money due to dropping home values. You can see in the chart below that quarterly revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) were thrashed after the second quarter last year.
OPEN revenue (quarterly) data by YCharts.
All of this set the company back, but the good news is that Opendoor adapted. It cut costs, appointed former Chief Financial Officer Carrie Wheeler as CEO, and by the second quarter of 2023, virtually all of the poorly priced inventory from the prior-year quarter had been sold off. It's a fresh start.
Avoiding a repeat of mistakes
On one side of the coin, last year's second-quarter disaster was a learning experience for the company. Opendoor misread the housing market, but wasn't alone in doing so. The market's abrupt decline pushed both Redfin and Zillow Group out of iBuying (Zillow and Opendoor have since partnered).
Flip the coin, and the company's biggest risk is repeating that mistake. Unfortunately, nobody can perfectly predict markets, which means that Opendoor will carry risk to some degree, especially while it's still such a young company. But the data in the housing market could signal continued strength ahead.
US existing home sales data by YCharts.
Home sales are extremely slow right now, slipping to one of their slowest paces in the past quarter-century. Sky-high mortgage rates, currently beyond 7% for a 30-year mortgage, are freezing the market. An estimated 92% of homeowners have a rate below 6%. Not many folks want to give up a low rate and buy a more expensive home at an even higher rate.
Demand might slow to the point where prices come down, and the market balances out. But it's possible that as prices begin to cool and affordability improves, the pent-up supply of owners sitting on home equity at low rates might enter the market.
Tremendous long-term potential
The investment potential is enormous if the company can avoid stepping on another land mine, as it did in 2022. Buying and selling with Opendoor has a net promoter score of nearly 80 out of 100 (as of earlier this year), indicating high consumer satisfaction for what is typically a very unpleasant experience with the traditional listing process.
The market opportunity is also tremendous; even generationally slow housing transactions mean more than 4 million people moved over the past year, and Opendoor purchased just over 2,600 homes in the second quarter. In other words, there is nearly endless room for the company to expand and grow its market share over time.
Opendoor's biggest problem today is that it's still proving its business model is viable over the long term, and that the housing market can ebb and flow without crippling the company. It suffered a setback, and shares were punished for it. But that also means there is immense potential for investors if Opendoor can succeed over time.
