Opendoor Technologies Is An Undervalued Long-Term iBuying Play

Real estate technology company Opendoor Technologies  (NASDAQ:OPEN) had one of the most talked-about IPOs last year.  It went public with one of Chamath Palihapitiya’s SPACs, and since then has caught the attention of long-term investors. It plans to disrupt the largely untapped US real estate market, and despite the challenges, OPEN stock has a strong long-term bull case.

A picture of the OpenDoor (OPEN) app on a phone.

The company focuses on iBuying. It is essentially an acronym for instant buyers, who offer instant cash offers typically lower than the market value. However, Opendoors algorithm and scalability are such that it can provide more competitive offers to sellers. It charges a transaction fee of 7%, which is slightly higher than the 6% that real estate agents typically charge. However, it’s not a bad deal at all, considering the number of features it offers and the convenience of the whole process. The real estate industry has been slow to adopt this trend, and therefore, the company aims to take advantage of this and disrupt the sector.

Competitive Review

Opendoor has the edge over its competition in the highly lucrative iBuying industry. From 2017 to 2019, it grew its revenues from $700 million to a whopping $4.7 billion.  That number is down considerably this year to $2.6 billion but is still head and shoulders above its competition.

Source: Muslim Farooque

From the table above, we can look at the revenues, gross margins, and total homes sold for the top three competitors in the sector in the past year. From the data, it is clear that Opendoor leads the pack with $2.6 billion in revenues and more than 9,000 homes sold. Moreover, in terms of gross margins as well, Opendoor has the decisive edge over its competition. Its gross margin of 8.50% is slightly higher than Offerpad (NASDAQ:Z), but it has the edge with its market share. Opendoors market share in the sector is close to 50% and will continue to increase as it expands the scope of its operations.

Future Outlook

As we inch closer to the post-pandemic reality, it is imperative to assess how Opendoor will bounce back from the crisis. In an investor presentation back in September last year, the company forecasted revenues to rise to $3.5 billion in 2021. Since then, there have been no amendments to that figure, suggesting that the number was conservative. We have seen how the Covid 19 vaccine got approved in record time and distributed to the general public. Moreover, inflation rates are creeping up slightly, but interest rates are still relatively low, supporting a strong housing market.

Perhaps more importantly, the company’s CEO Eric Wu states that he would be expanding into 21 new markets, thereby doubling its footprint in comparison to 2020. This represents a massive upside to the provided forecast. Before the pandemic, its run rate for the first quarter of 2020 was at $5 billion in 21 markets. Based on simple arithmetic, you’re looking at $10 billion in revenues if you double the markets.  Though $10 billion may be a bit far-fetched, $3.5 billion seems extremely conservative in hindsight.

Bottomline on OPEN Stock

Opendoor was slowed down by the pandemic but appeared to be on track to grow its business exponentially this year. It has the decisive edge over its competition across all major metrics and will continue to widen the gap in the coming years. With its plans to expand its footprint, I expect its revenues to fall between $5 billion to $7 billion. Moreover, based on its growth potential, it is trading at less than one times its trailing-twelve month’s sales figure. Hence, OPEN stock is a great long-term investment.

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

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