It’s been a little more than a month since OpenDoor Technologies (NASDAQ:OPEN) completed its merger with Social Capital Hedosophia Corp II and OpenDoor stock began trading as part of the Nasdaq.
If you’re not familiar with OpenDoor, it’s an end-to-end real estate platform that enables consumers to buy and sell homes online.
In OpenDoor’s November 2020 analyst presentation, the company provides investors with a deep dive into its management team. Who they are, what they do, and where they’ve been.
The top seven in management is like the starting lineup of the NFL’s Kansas City Chiefs. A possible dynasty in the making?
InvestorPlace contributor Mark Hake thinks so. I’ve not had a chance to break down OpenDoor’s strengths and weaknesses. Today, I’ll try to remedy that.
OpenDoor’s Obvious Strengths
My colleague recently was kind enough to do a quick analysis of OpenDoor stock versus Zillow (NASDAQ:Z), what he calls an 800-pound gorilla. Hake concluded that based on the available financials, OPEN has an enterprise value-sales ratio of 4.25x; Zillow’s, by comparison, is 6.83x, or almost 61% more expensive. Here’s what he wrote on Jan. 20:
Based on this metric, OpenDoor’s EV should be 6.8x its sales. This means its EV should be 6.83x $3.5 billion in forecast sales. That equals $23.9 billion. Moreover, we have to add back the $1.539 billion in cash to derive the pro forma market cap. This means the market cap for OpenDoor stock should be $25.44 billion.
As I write this, OPEN stock has a $16.3 billion market capitalization, 36% less than my colleague’s estimate. So, its first obvious strength is that its valuation hasn’t run away from itself as many special purpose acquisition company (SPAC) mergers did in 2020.
A classic example is QuantumScape (NYSE:QS), a developer of next-generation solid-state lithium-metal batteries for electric vehicles. Backed by Bill Gates and Volkswagen (OTCMKTS:VWAGY), the company completed its merger in November with Kensington Capital Acquisition Corp.; a SPAC focused on combining with an energy-related enterprise.
I said days before the QuantumScape merger with Kensington that its stock was worth more than $12.50, the price it was trading earlier in November. It’s now hovering around $50.
What’s its EV-sales ratio? It has none.
That’s because it has no sales at the moment. However, QuantumScape’s merger presentation projects 2028 revenue of $6.4 billion. Based on a current enterprise value of $17.6 billion, it has a 2028 forward EV/sales ratio of 2.75x.
However, this multiple is based on projections seven years out. Hake’s numbers for both OpenDoor and Zillow are based on 2021 projections.
From where I sit, OpenDoor has grown revenues over the last five years from $53.5 million in 2015 to $338.7 million in 2016, $711.1 million in 2017, $1.8 billion in 2018, and $4.7 billion in 2019. That’s a four-year compound annual growth rate of 206.8%.
While I like where QuantumScape is headed, there’s no question OpenDoor’s pathway to profitability is far more certain.
In my mind, that makes it a much better gamble.
The Weaknesses That Hold OpenDoor Stock Back
While I don’t see too many InvestorPlace contributors with anything negative to say about OpenDoor, Lou Carlozo said that it needs more time to prove its worth in early January.
He specifically honed in on the fact that OpenDoor’s revenues declined 12% year-over-year in the first six months of 2020. OpenDoor’s Jan. 12 S-1 registration statement says its sales in the first nine months of 2020 declined by 33% to $2.33 billion from $3.48 billion a year earlier.
As my colleague reasons, a digitally native platform such as OpenDoor, which operates entirely online, ought to be ideally positioned to benefit from stay-at-home orders.
One would think.
However, when you consider that OpenDoor stopped buying homes in March 2020 and didn’t resume the buying until May, it’s not surprising that its sales fell by 12% in the first half of the year.
It’s also not surprising that its Q3 results through the end of September fell by 33% in the first nine months of the year, given its operations across all 21 markets didn’t fully resume until the end of August.
As it states on page 59 of its S-1, it kept selling homes throughout the shutdown without being able to replenish inventory, which led to an 88% reduction from $1.31 billion at the end of 2019 to $152 million as of Sept. 30.
It had sequential declines in revenue in the second and third quarters of 2020. It expects a sequential decline in Q4 before growth resumes in early 2021. By the end of this year, it ought to return to annual sales of approximately $4.7 billion.
The big question for investors is whether it can rebuild the inventory fast enough to make 2021 a winner rather than another loser.
My Initial Verdict
In February 2020, I wondered if Zillow stock would ever get back to $150, where it traded in July 2014. As I write this, Zillow is $5 away from that target. It’s why I put Zillow on my best and worst stock picks of 2020.
In my article, I suggested that Amazon (NASDAQ:AMZN) could buy Zillow in 2021. It’s possible the same thing could be said for OpenDoor.
That said, Zillow’s got some profitability, while OpenDoor will have to execute to perfection over the next 12 months.
While OpenDoor might have a quality management team on par with the Kansas City Chiefs, I don’t think it’s gotten to the status of the New England Patriots, Pittsburgh Steelers, or San Francisco 49ers.
So, unless you’re a very speculative and aggressive investor, I’d go with Zillow until OpenDoor demonstrates it can find its way back to the days pre-Covid.
I like OpenDoor stock. Just not enough to say it’s a screaming buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.