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It’s Way Too Early to Declare Opendoor the Amazon of Houses

Social Capital Hedosophia Holdings II (NYSE:IPOB) seemingly has all the makings of the winner. It has a great backer, an exciting story, and the stock is already trading strongly. The company’s business, housing, is also booming right now. What’s not to like? All in all, IPOB stock seemingly has a perfect set-up.

cardboard miniature house on table back-lit by sunlight through a window
Source: Shutterstock

However, when you poke under the surface a bit, there are at least a few drawbacks to consider. Here’s some things you should take into account before potentially investing in what will soon become Opendoor.

The Amazon of Real Estate?

While IPOB stock technically represents Social Capital Hedospohia, that entity will soon merge with Opendoor. That’s the investment appeal here. Opendoor is a leading portal for the real estate market. And, unlike a passive marketplace, Opendoor is an active participant, as it is willing to buy and sell properties in something akin to home flipping. In theory, this could be great. You have a digital showroom that is attractive on its own. And as the site collects more data, it should be able to outmaneuver other participants in the marketplace.

This creates the ready analogy to Amazon (NASDAQ:AMZN); why not copy their success with houses? However, unlike Amazon, Opendoor is not the first mover in this market. It is competing against already-established companies such as Zillow (NASDAQ:ZG) and Redfin (NASDAQ:RDFN).

Additionally, there’s much less of a benefit to being the winner than Amazon. People need to buy ordinary consumer goods frequently, so once Amazon earns a customer’s loyalty, it gets a ton of mileage out of it. Most people, by contrast, buy homes infrequently. So the customer acquisition cost is not spread out over multiple deals. And the brand effect is much less since the frequency of transactions is so low.

Long story short, this is not as attractive a market as Amazon, and Opendoor already faces numerous credible rivals.

This Is a Huge SPAC Deal

Prior to the year 2020, special purpose acquisition companies (SPACs) were usually aimed at small merger targets. It was rare that a SPAC deal would top $1 billion in size. Even this year, as SPACs boomed, the usual deal size was on the small side. This is part of what makes the Opendoor acquisition so exciting; this will be a large business immediately once it is public. It’s hard for most SPAC sponsors to pull this off.

However, Chamath Palihapitiya is no ordinary SPAC operator. Palihapitiya is frequently on television or otherwise making celebrity appearances.  He recently just launched his sixth SPAC – it’s truly incredible how fast he has developed this space. The original SPAC he led, Virgin Galactic (NYSE:SPCE), just launched one year ago and is off to a fine start. So investors in Social Capital Hedosophia Holdings II – what will soon be Opendoor – are in good company.

It’s Also an Expensive One

If you watch CNBC, you’ve probably heard the Opendoor deal quoted at a $4.6 billion valuation. That’s true if IPOB stock in fact traded at the $10 deal price. As it stands now, however, shares are going for more than twice that figure, which greatly ratchets up the actual valuation here. The true price is even higher than you’d first imagine, as the SPAC form of going public includes dilutive warrants that further increase market capitalization once they are exercised.

Another part of the equation stems from the fact that current IPOB stock owners will only have 6.6% of the overall ownership of the firm once the deal closes. Original owners will get 79% of the combined Opendoor. The other 14% will go to the SPAC sponsors, management, and people that invested in the most recent equity offering. This isn’t particularly unusual for a SPAC, however do know what you’re paying for. In any case, IPOB stock is not cheap once you look at the fine print.

That goes for the valuation metrics as well. Opendoor is a bit of a tricky beast to judge. Since it is buying and reselling homes – an inherently low-margin business – you can’t judge it on a price/sales basis. Last year, for example, Opendoor earned an average 6.4% profit on each home it resold. That’s fine, however, this is clearly not a software-type business where you get margins 10 times that.

However, based on contribution margin, which takes Opendoor’s gross profit and removes certain costs, the company is making around $100 million per year, excluding the impact of the novel coronavirus. Needless to say, paying $10 billion or more for a $100 million a year of income is generous.

IPOB Stock Verdict

From a purely fundamental basis, IPOB stock is not an attractive investment candidate at this time. The business is way too expensive given its limited profitable and the intense competition it will face in its core market.

As for its trading prospects, however, that’s a different game. Give the man credit, Chamath Palihapitiya is a compelling presenter, and it’s not surprising that the stocks he underwrites attract supportive shareholder bases.

Combined with the hot housing market, IPOB stock could have a strong 2021. Just keep one eye on the exits. With the valuation already so steep, shares would get pummeled on any earnings miss or revenue growth deceleration.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Ian Bezek has written more than 1,000 articles for and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. 

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