SUBSPAC

The Rundown (6/16/21)

Opendoor Technologies is a Bet on the Housing Market

Opendoor Technologies has revolutionized the real estate market by enabling users to buy and sell homes online. While moving the most important financial purchase of a consumers life online may seem counterintuitive, it not only reduces transaction fees but also makes it more convenient for both the buyer and seller. The company has seen tremendous growth since its inception in 2014 and is expected to benefit from post-pandemic tailwinds.

Online Real-Estate Revolution 

Consumers have increasingly migrated to online real estate transactions due to the pandemic. Since its inception, the company has completed over 80,000 transactions. The company is expected to grow rapidly in the next few years by expanding to other markets. The real estate market in America is massive with over 5 million homes sold annually and transactions valued at over $1.6 trillion a year. Furthermore, the market is ripe for disruption with over 2 million realtors competing in a highly fragmented market with less than 1% online penetration. Opendoor has taken a 90-day process that is filled with uncertainty and has converted it into a few simple steps online.

The pandemic has also accelerated a shift in the method of consumer spending, with a safety-first approach. Consumers are demanding digital-first experiences and Opendoor provides a contactless way to buy and sell homes. With remote work being a new reality, buyers are moving to the suburbs and actively avoiding dense areas. This has resulted in homes being built at a record pace with real estate transactions keeping pace. These trends are expected to continue in the future and will hugely benefit the digital approach of the company.

Opendoor has also significantly improved its technology stack in the last few years resulting in a better experience for consumers. The company has developed real-time models to determine the current and future value of a home. The company has also automated the process of closing the transaction and the title transfer and escrow processes, ensuring a smooth fulfillment in the transaction.

Lower Brokerage, Higher Convenience  

Opendoor has two key advantages over the existing retail estate brokerage services. First, the company charges 5% brokerage for transactions compared to the standard 6% commission by real estate brokers and 8.5% fee charged by competitors like Zillow. In addition, other transactions charges associated with a home-like staging, seller concessions and closing costs can run upwards of 6%, but with Opendoor, consumers can save on this fee. Opendoor is thus a better option for home sellers as they can potentially save thousands of dollars in revenue.

While critics argue that consumers will never switch to the online model for real estate transactions, the convenience of a sale has made many consumers transition to this new model. Opendoor transactions give sellers a cash settlement in less time than the traditional process, while not dealing with the hassle of having to deal with multiple showings. Opendoor also benefits buyers with flexible closing days, in-app financing and a completely digital offer process. The combination of low transaction costs and high convenience has led to the company having one of the highest conversion rates at 34%.

Sizeable Market, Strong Growth Expected 

Opendoor currently operates in 21 markets and had revenues of $2.5 Billion in 2020. The company has launched operations in 21 new markets this year and is on target to reach 100 markets by the end of 2024. Opendoor had a rough few quarters, which led to the company’s sales dropping by 45%. But with the recent boom in the housing market, management is projecting homes sold to 4x in 3 years to 38,000.

Several factors are expected to increase the contribution margin, including the maturation of existing markets, continued optimization of cost structures and penetration of high margin services. The company is expected to increase margins based on the existing ancillary services such as title insurance and mortgage services and new planned services in the future.

This will help the company increase its contribution margin from 3% in 2020 to 5.5% in 2023. While this is far from the company’s long term contribution margin target of 9%, the growing economies of scale and continued optimization with its algorithm is expected to help the company reach its goal and attain profitability.

Attractive Valuations 

Opendoor is not currently profitable, but it is trading at a reasonable price compared to its competitors. Opendoor trades at a price/sales ratio of 1.9, which is much lower than that of competitor Zillow at 7.67. This is especially cheap considering that Opendoor does 4.4x sales of Zillow. The company also has a first movers advantage and launched four years before Zillow in 2014.

While Opendoor is not profitable yet, it is cash-flow positive. The company’s free cash flow margin consistently improved between 2016-19, before the downturn in the market in 2020. Given that the company has only penetrated 0.8% of the market, it has huge potential to generate cash flows in the future.

Investment Risk 

Opendoor operates in a low margin business with a lot of competitors upcoming. There is also a risk to consider where some consumers are still reluctant to sell their homes online. The company is not profitable yet and isn’t expected to reach profitability at least for another few years. While the current real estate market is booming, a downturn like in 2008 could be disastrous for the company. In 2020, when the housing market saw a recession, the company’s revenue fell by over 45% and had to lay off 35% of its workforce.

Conclusion 

Opendoor is a disruptor in the real estate market and has had the benefit of being the first mover in the market. Consumers have increasingly migrated online to buy and sell homes due to the pandemic. Consumers benefit from higher convenience and lower transaction fees, enabling a better experience for both buyer and seller. As the company continues to expand in more markets, the economies of scale are expected to result in higher margins, which will fast track the company to profitability. Opendoor is a market leader with immense potential in a growing space and will potentially create tremendous value for shareholders in the future.

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