OPEN with Nobias Technology: Case Study on Opendoor Technologies
With inflation data coming in at levels that investors haven’t seen since the early 1980’s, speculatively valued growth stocks continue to suffer, due to fears of rising interest rates. As rates rise, the risk premiums that investors are willing to pay for equities tend to fall because of their relative attractiveness to risk-free returns (the interest rates paid by fixed income investments).
With that being said, 2022 has been a terrible year for speculative growth stocks. Many former market darlings in the disruptive growth space are trading for just a fraction of what they were worth a year ago. One such company is Opendoor Technologies (OPEN), which fell 14.5% during Friday’s trading session (on the heels of the most recent inflation numbers), pushing its stock price down to levels approximately 77.5% below its all-time highs.
Samuel Smith, a Nobias 4-star rated author, recently touched upon Opendoor’s significant sell-off and the long-term opportunity that it has created for investors in an article titled, “I Don't Often Buy Tech Stocks, But When I Do I Buy 3 That Could Change The World”.
Smith notes that, “Valuations in the space have become attractive in recent months thanks to the ongoing severe bear market in tech/high growth stocks.” He continues, saying, “Real Estate constitutes the largest sector of the United States’ economy with the GDP value added of $1.898 trillion accounting for 13% of the national GDP. It is also one of the ripest sectors for technological disruption as there are a lot of lingering inefficiencies and archaic practices in the industry. As a result, the growth runway potential for PropTech companies is immense.”
OPEN Jun 2022
Smith highlights his bull thesis for OPEN in the property tech industry, stating: “One of our favorite opportunities in this space is OPEN. Buying a home has long been viewed as the cornerstone of the American Dream, but today it is getting harder than ever to achieve. Between soaring home prices, the threat of rising interest rates, and lingering costly inefficiencies associated with the process (such as the hefty realtor fees and other burdensome shopping and closing processes and fees), home buying and selling remains a giant headache.
These hassles become even more glaring when placed in the modern context of commerce, where the internet, mobile applications, consumer data, and stellar customer service are making the shopping and selling experiences easier, faster, and - in many cases - cheaper than ever. Real estate has been left behind in this rapid disruption and transformation, and OPEN's mission is to push it forward into the modern age of internet and data powered commerce.” He also said, “At the moment, OPEN looks like one of the more promising opportunities in the sector, as its iBuying business model is battle tested and is clearly winning against competitors at the moment.”
Smith discussed the potential risks at play with OPEN as well, stating, “The biggest risks to keep in mind are the health of the housing market and general market sentiment on growth/tech stocks. However, as long as investors keep a long-term perspective and management continues to manage the balance sheet and inventory levels prudently as they have thus far, OPEN should be able to overcome these two primary risks and continue to leverage its competitive advantages to generate outsized long-term returns.” And ultimately, he concluded, “We view OPEN as a speculative Strong Buy at current prices.”
Nobias 4-star rated author, Davide Ravera, recently wrote an article which discussed the iBuying business model and OPEN’s plans to make its disruptive approach mainstream. Ravera said, “Simply put, iBuying is a technology that gives you the ability to buy and sell your real estate property directly online without the need for a realtor.”
Regarding the current market share of the iBuying industry, Ravera wrote, “Over the years, this technology developed, transforming the iBuying market into a relevant share of the U.S. Real Estate secondary market: today, the iBuying market represents about 1% of the US's home buying and selling market.” He continued, “Opendoor's goal is to bring iBuying from 1% of sales to the norm.”
Ravera noted that OPEN is currently operating in 44 markets across the United States; however, he said that the company’s stated goal is to eventually reach roughly 70% of U.S. consumers. Therefore, Ravera highlighted OPEN’s total addressable market (TAM), stating, “In the 10-K, the total addressable for real estate transactions in the U.S. is quantified as about 2.3 trillion in 2021. That means a market of about 1.6 trillion for Opendoor in the future. Indeed the goal of Opendoor is to reach 70% of the population in the United States. After that, it might try to expand further to cover a higher percentage of the United States or even other countries internationally. We expect the addressable market to increase at about 3.8% per year, in line with a real 1% home appreciation and a 10-year inflation expectation of 2.8%.”
Ravera says that Opendoor’s margins have steadily improved over the last year; however, he is quick to point out that this operational performance has come during one of the strongest bull markets in the housing space in years.
Investors aren’t certain that OPEN’s model will prove to be profitable over the long-term (which is why the stock is so volatile). Yet, Ravera believes that with increasing scale, OPEN’s business model will prove to be moderately successful over the long-term. He said, “Clearly, being a cyclical industry, you have to expect the gross margin to go down in a negative market for real estate. That's why I expect the business to become profitable in the next ten years but to remain with a low marginality in the long run.”
In his conclusion, Ravera highlighted the strong disruption potential for OPEN, noting the stock’s long growth runway due to the very large total addressable market that it could capture; but, the speculative risks at play for OPEN inspired him to place a “neutral” rating on shares.
Regarding those risks, Ravera stated, “For example, how could the company behave in a bear real estate market? Can the company scale without requiring ever-larger house listings and, therefore, more and more investments?” Ultimately, he concluded, “These are unanswered questions from our side, and for this reason, we remain neutral on OPEN for the time being.”
Nobias 4-star rated author, Tezcan Gecgil, highlighted OPEN’s Q1 data in an article published on March 30th, titled, “Opendoor’s iBuying Dominance Makes OPEN Stock a Bargain Under $10”. Gecgil wrote, “On Feb. 24, Opendoor issued Q4 results. Revenue surged to $3.82 billion, representing a whopping 1,435% increase YOY. Opendoor acquired 9,639 homes during the quarter.”
Gecgil continued, “On the other hand, the company sold more homes than it purchased, ending 2021 with $6.1 billion in inventory. Total homes sold in 2021 soared 119% to 21,725, helping to fuel revenue growth of over 200% to $8 billion.”
Regarding profits, Gecgil stated, “However, net loss widened to $191 million, or 31 cents per share, compared with $54 million in the prior-year quarter. The higher-than-expected loss was primarily due higher selling costs and higher stock-based compensation.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
With the Q4 results in mind, Gecgil said, “Q4 financials seem to prove that the iBuying model can work. Opendoor has secured the lion’s share of the iBuying space following Zillow’s exit.” On March 30th, OPEN shares were trading in the $9.15/share area.
Gecgil concluded, “OPEN stock looks priced to reflect all possible adverse outcomes and not much of its potential. As a result, the current depressed valuation leaves plenty of room for significant upside and provides a buying opportunity for long-term investors.”
Today, OPEN trades for just $5.70/share, implying that the long-term value proposition has become even more attractive. Looking at the aggregate data that the Nobias algorithm has collected regarding credible reports and opinions published on OPEN shares, it’s clear that the majority of authors/analysts that we track are bullish on OPEN after its recent sell-off. 78% of recent articles published on the stock by credible authors have expressed a “Bullish” bias.
Right now, the average price target being applied to OPEN shares by the credible Wall Street analysts that Nobias tracks is $18.00/share. Relative to today’s $5.70 share price, this average price target implies upside potential of approximately 216%.
Disclosure: As of 6/12/2022, Nicholas Ward has no OPEN position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.