When I first got the call to give my take on Social Capital Hedosophia Holdings II (NYSE:IPOB), I thought to myself, “Oh great, another SPAC. IPOB stock is a placeholder for sure.”
Honestly, it would be the shock of my life if a company named Social Capital Hedosophia Holdings II wasn’t a SPAC, or special purpose acquisition company. Basically, we have here a “backdoor” mechanism to take real estate technology services firm Opendoor public. But before the name change is official, it’s IPOB stock for now.
Of course, you could blast Opendoor as yet another SPAC with lofty ideals and questionable fundamentals. However, I would take a closer look at IPOB stock before making any rash decisions based on assessments due simply to association.
In my opinion, Opendoor is an extreme investment. That’s because the company has the power to be completely disruptive and yet that very disruption could cause IPOB problems down the road.
Before I get into the bull and bear case, let’s discuss what really drives IPOB stock: iBuyers. No, this isn’t the name of the latest app of the week. Instead, it describes the concept of a company leveraging computer technology to make a reasonable, fair market offer on your home. Additionally, the process is very quick, convenient and predictive.
What I mean by the latter is that buying or selling a home is a long, intensive and complicated process. And that makes the predictability of when a deal will close uncertain. Yes, once negotiations reach escrow, it’s relatively easy to figure out when the transaction will be complete. However, getting to that point involves much guesswork.
Sure, the novel coronavirus has quickened the pace of real estate transactions due to demand exceeding supply. But this situation will likely not go on forever. What happens when things more or less normalize? The answer to that question is the driving force behind Opendoor.
IPOB Stock Is Levered to a Perhaps Unassailable Bull Case
When you think about disruption, you immediately conjure up names like Amazon (NASDAQ:AMZN). As you know, the coronavirus fueled e-commerce’s rise to further dominance. But even without this tailwind, the online sales revolution had been on a strong uptrend.
A substantial component to the e-commerce phenomenon is convenience. For the first time, you can order something online and receive the product very quickly. However, that convenience has a cost. For instance, Uber Technologies (NYSE:UBER) has been flat this summer, probably due to its Uber Eats service being incredibly expensive.
Put another way, digitalization still has an opportunity gap. You often pay a pretty penny for the convenience of e-commerce. That’s why it represents less than one-fifth of total retail sales as opposed to say half.
But what if the solution of a digitalized business model was so convenient that it well exceeded the cost to provide that convenience? At that point, you’d have a situation where a platform not only is a viable option but a service of first resort.
Immediately, the concept of services of first resort seems ridiculous given the number of tech-based solutions out there. However, when you draft a letter on your PC, what word processor are you using? Chances are, it’s Microsoft (NASDAQ:MSFT) Word.
Or what if you’re trying to sell a car and you want high-dynamic photos of your ride? More than likely, you’re going to Adobe (NASDAQ:ADBE) Photoshop. Or what if you’re looking for something online? Here again, the choice is almost universal: Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google search engine.
In this context, Opendoor has a very real shot of being the service of first resort for real estate transactions. Let’s say you got a great job offer out of state and need to sell your home quickly. Why bother with the traditional approach of marketing your home, conducting open houses and going through intensive negotiations? Instead, let Opendoor handle all that junk for you and you’re on your way.
It’s this incredible simplicity – the digitalization of real estate – that’s driving substantial interest toward IPOB stock. But this disruption can also be its downfall longer term, which I’ll get into below.
To Many, Disruption Is Distasteful
Though many investors praise Amazon, they also criticize it for its bottom-line thinking. And that’s not surprising because disrupters only care about the bottom line. After all, they’re called disrupters, not amalgamators.
Further, it’s not just snowflake Democrats shedding liberal tears that criticize Amazon. One of the company’s fiercest critics is none other than alpha President Donald J. Trump. So, in many respects, disruption can be a bipartisan issue.
In my view, this could be a big headwind for IPOB stock down the line. For starters, companies like Opendoor will eventually cut out middlemen entities. To be fair, Opendoor claims to work with real estate agents, not seek to replace them. But what happens when the iBuyer industry becomes incredibly robust? Keep in mind that the iBuyer industry was already accelerating years prior to the pandemic.
When this sector becomes fleshed out, the need for agents diminishes. And that may cause economic and labor market headaches, something that no future presidential administration can ignore. Eventually, that could impact the IPOB stock price.
Also, the technology that underlines IPOB stock and similar investments could come under fire for housing discrimination. One of the reasons why Opendoor is so effective is because its computer tech can conduct comparative market analyses at lightning speeds, taking into account multiple variables to arrive at a reasonable offer for a home.
Depending on what variables are run, iBuyers could end up ignoring certain communities and only servicing privileged ones. Over time, the industry – and not just Opendoor specifically – could draw attention from the Department of Housing and Urban Development.
While this might seem like a far-fetched risk factor for IPOB stock, recall that HUD sued Facebook (NASDAQ:FB) for data-driven advertisements that allegedly ended up “encouraging, enabling and causing housing discrimination.”
Specifically, the suit claimed that Facebook’s advertising platform allowed client companies “to improperly shield who can see certain housing ads.”
Simply, the precedent for data to become discriminatory – even if the target company itself is on the up and up – has a precedent. And that’s not something you should ignore when considering IPOB stock.
A Compelling Opportunity for the Next Few Years
With the possibility of a blue wave in the upcoming election, I’m a little bit concerned about what Democrats have in store regarding innovative technologies. One of the worst offenders are California Democrats. Look at how their initiative to force companies to reclassify independent contractors as employees did to comedians!
The initiative, known as AB-5, was written basically to give ride-sharing drivers healthcare benefits. Instead, the law ended up hampering the gig economy. What California Dems consistently fail to understand is that not everybody wants Soviet-style governance. And that’s irrespective of whether a person supports Trump or Joe Biden.
Therefore, I’m also certain that Democrats will have something to say about iBuyers. And yeah, that may not bode well for IPOB stock longer term. But for the next few years, I think the underlying technology is groundbreaking. If you want a service of first resort early, this is your chance.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.