The real estate disruptor has finalized a merger with Social Capital Hedosophia III and will trade under the ticker ‘OPEN’. Is Opendoor stock a buy?
Dec. 21, 2020
What does Opendoor do?
Opendoor (NYSE: OPEN) operates an online marketplace in which customers can buy and sell their houses easily, a process known as iBuying. Homeowners can get a quote from Opendoor and sell directly to the company, who may make some upgrades before then selling it on. The majority of Opendoor’s revenue comes from fees on these transactions. They also provide ancillary services like title & escrow, mortgages, & repairs.
Co-founder and CEO of Opendoor Eric Wu had this to say:
“The vision for the company is to build a one-stop-shop that is digital and online to buy and sell homes.”
Bull Case for Opendoor
Perhaps the most inviting prospect for an investor is the size of Opendoor’s market opportunity. The real estate industry is worth $1.6 trillion a year in the U.S. and so little of that is spent online. The company’s mission is to disrupt this and streamline one of the most costly, time-consuming, and arduous non-health-related processes most people will go through in their lives. The fact that a new wave of digitally native homebuyers are now entering the real estate market for the first time will also help progress. If its execution can match its ambition, there really is no limit to the potential of this company.
Another big factor in the success of Opendoor will be its services catalog. The first service it launched was Title and Escrow in 2017, which has 75% margins and contributes about $1,700 in contribution margin per home. Recently, it has expanded to Home Loans, Buy With Opendoor, and List With Opendoor. It forecasts contribution margins to improve from $11,000 to $20,000 from each house sold thanks to relatively low hanging fruit in this area.
Opendoor is projecting some pretty impressive growth figures over the next 3 years. It expects revenue to grow at a 58% CAGR, reaching $9.8 billion by 2023 from $2.5 billion forecasted for 2020. This growth will be spurred by expansion in its existing 21 markets as well as launching in 20 new markets over the next three years. Interestingly, the expansion of its service catalog will contribute to 5% growth in revenue, while driving growth of 30% to Opendoor’s profits, showing how important this aspect of the business is.
Bear Case for Opendoor
Opendoor is a risky investment. It operates on thin margins for each transaction, relies on debt for every purchase, and is at the whim of a number of wider macroeconomic factors that it has no control over. For anyone who has been watching this stock since Social Capital Hedosophia III (IPOB) announced its intent to merge with the company, you will be used to some intense swings in its share price. I only expect this volatility to continue as the merger has been finalized. For anyone with a low risk-tolerance, this is not the stock for you.
While it may be the current leader in the iBuying market with around 70% market share, Opendoor is far from the only fish in the sea. Zillow and Redfin are big names in the space, and while there is more than enough of an opportunity for a number of competitors to thrive, there is a big risk of the market becoming fragmented and regionalized, without one clear national leader emerging. Intense competition could also put pricing pressure on already tight margins.
Lastly, Opendoor has been making a loss since its inception and only expects to eke out a profit by the end of 2023. It is certainly not a stock for the faint of heart.
Should you buy Opendoor stock?
Opendoor is one of the most interesting high-risk, high-reward investments out there right now. It has targeted one of the largest undisrupted markets in the world, and if successful, could provide an Uber-level of disruption to the industry. I think there are tailwinds in place that make Opendoor a good investment right now, with the promise of low interest rates for the next few years, and an influx of digitally-native millennials entering the housing market for the first time.
However, one must also take the risk factors into consideration before investing in Opendoor, of which there are many. That being said, for those with a long time horizon and a diversified portfolio, Opendoor stock is a great risk-reward opportunity that can provide multi-bagger returns.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above.