Opendoor Labs is looking like it will be a winner with its merger with Social Capital Hedosophia Holdings Corp II (NYSE:IPOB). The deal with IPOB stock, which is a SPAC (special purpose acquisition corporation), was announced on Sept. 30. Since then the stock has risen over 13% as of Oct. 19.
Opendoor Labs buys real estate and then repairs and resells the properties. It started losing money during the Covid-19 pandemic outbreak. So it decided to raise capital by going public with this SPAC deal.
The deal is valued at $4.8 billion enterprise value (EV) at an assumed price of $10 for IPOB stock. Obviously, since the stock is now at $21.48, as of Oct. 19, the EV valuation is now over twice that original amount.
Moreover, the transaction will provide $1 billion to Opendoor. This money will be very useful to the company since it buys and sells many homes. For example, the company made $4.7 billion in revenue last year. Opendoor sold over 18,000 homes through its online portal in 2019.
Reviewing the Merger Transaction
The post-closing combined entity will end up with $1.5 billion in cash and securities on the balance sheet. Moreover, Page 44 of the slide presentation shows how the deal is undervalued.
For example, there will be 630.7 million fully diluted shares outstanding after the merger closes. Therefore, the pro forma market capitalization for the combined company, $21.48 today, is $13.547 billion. But to get the EV number we must deduct the pro forma cash of $1.5 billion. That makes the pro forma EV $12.047 billion.
To put that number in perspective, compare it to the company’s 2019 revenue of $4.7 billion. Therefore, it has a pro forma EV-to-sales ratio of 2.56 times (i.e., $12 billion divided by $4.7 billion).
Valuing Opendoor Labs Post-Merger
However, markets always discount the future. Opendoor forecasts that its 2023 revenue will be $9.8 billion on page 40 of their slide presentation. Therefore the forward multiple for 2023 is just 1.23 times (i.e., $12 billion divided by $9.8 billion). That is ridiculously cheap.
For example, Zillow Group (NASDAQ:Z) has a $22.09 billion market value and $2.579 billion in net cash. Therefore its EV is $19.51 billion. Now compared to its last 12 months’ revenue of $3.583 billion, its EV-to-sales ratio is 5.45 times.
That compares to IPOB stock (post-merger with Opendoor Labs) which has a pro forma 2019 EV-to-sales ratio of 2.56 times. In other words, IPOB stock (post-merger) is way too cheap, even though it has risen a good deal.
Moreover, we can discount the IPOB/Opendoor 2023 EV-to-sales ratio of 1.23 times. For example, discounting the 2023 forecast revenue of $9.8 billion by 20% per year lowers it by 24.4% to a present value of $7.4 billion in revenue. Therefore, the discounted 2023 EV-to-sales ratio is 1.62 times (i.e., $12 billion divided by $7.4 billion).
Therefore, IPOB stock could rise much further. If Zillow trades on an EV-to-sales multiple of 5.45 times, and IPO stock is at 2.56 times (and even lower using 2023 discounted revenue), you can see the upside. A similar argument could be made when comparing IPOB stock with Redfin (NASDAQ:RDFN).
This implies that Opendoor Labs/IPOB stock is due to rise at least 100% either before or after the merger closes.
What to Do With IPOB Stock
I previously wrote an extensive article describing how investors can make money with in-the-money warrants of SPAC mergers either before or after the merger closes. I highly urge you to read that article since it applies here.
For example, the IPOB warrants, which trade under the symbol IPOB.WT or IPOB-WT, trade at a price of $6.27. Here is how that price works out.
The exercise price is $11.50 per share. Since the stock is at $21.48, the implied price of the shares, upon exercise of the warrants (any time in the next five years) is $17.78. That means there is $3.70 of value in these warrants (i.e., $21.48 minus $17.78).
The warrants are likely to be called by the company after the merger goes through. This is because if the stock price stays over $18.00 per share for 30 days, it can force each warrant holder to either exercise their warrants (i.e., pony up $11.50 per share for every warrant), or sell them at 1 cent per warrant. Obviously, everyone will convert their warrants.
But so what? Just remember that you should buy no more warrants than you could afford to buy in shares. This means that you will have an in-the-money value of at least $3.70. Therefore, if the stock does not move higher, not likely, your return would be 20.8% (i.e., $3.70 divided by $17.78 per warrant bought).
And don’t forget that I valued IPOB stock significantly higher. In my previous article on IPOB stock, I pointed out there have been some critics of the company’s business model. Keep this in mind when reviewing a potential purchase of the stock.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
