The decision of Zillow Group (NASDAQ:Z) to back out of the home-flipping business and wind down Zillow Offers can either be a game-changer for Opendoor (NASDAQ:OPEN) stock, or it can be an example that something is fundamentally wrong in the iBuying business.
In business, a decision by one of your direct competitors can either benefit or hurt your economic viability.
It can also define the future of your business model and its performance.
In this article, I will mostly focus on the risks and opportunities that Open Technologies has to offer.
As a digital platform for residential real estate in the United States, Open Technologies enables consumers to buy and sell a home online. And I will start with a very quick note on the fundamentals of OPEN stock.
OPEN Stock: The Most important Concept
Any business has only one major goal, to be profitable and to maximize profitability if possible. In the short-run economics, analysis dictates that you can run a business with losses, however — in the long run, this trend is not sustainable.
Moreover, Opendoor Technologies has not been profitable for the past three consecutive years. In 2018-2020, on its first core business, it had a negative operating income, and secondly, it had net losses after taking into consideration other accounts on the income statement.
When net losses are followed by a sharp decline in revenue for 2020 of about 45%, worries are fully justified about the performance of Opendoor Technologies’ business model and the effect it might have on OPEN stock.
Zillow recently took a bold, but fully justified decision, to back out of the home-flipping business and to wind down Zillow Offers. Why bold? It has built over the past years a business model entirely based on the idea of flipping homes, becoming an iBuyer.
Why fully justified? Because it lost money. So it was a matter of time to decide to terminate its instant-buying (iBuying) division for the rest of the year.
Why do I consider it to be a huge lesion for Outdoor? Simply because Opendoor runs a similar approach to Zillow, it is an iBuyer. Therefore, my argument is that, if something did not work out for one of your largest competitors, then it may be a good idea now to evaluate what went wrong for your competitor.
What is iBuying?
“The iBuyer model is an instant method of buying and selling homes that is revolutionizing the real estate market.”
In a nutshell, iBuyer.com says that “iBuyer stands for Instant Buyer. In technical terms, the iBuyer model uses artificial intelligence (AI) to deliver home value. Using data about your property and mathematical algorithms, the iBuyer generates an automated valuation model (AVM) that gives you an instant all-cash offer. The iBuyer then makes any repairs, markets the house, and re-sells it.”
If Outdoor implements a business model that does not have any of the structural problems that lead Zillow into severe financial trouble, it can gain a larger market share and thrive in its business.
But what are the risks to avoid now?
- AI and price forecasting volatility
- Macroeconomic uncertainty
- Labor shortage
- Supply vs demand equilibrium
- High competition from the traditional market
- A capital and labor-intensive industry
Now, what Opendoor needs mostly is not to make Zillow’s mistake. It needs a large inventory of houses to sell, and hope that their prices will go up to make a profit. Hoping and wishful thinking are hardly traits that make a business a successful one.
With the U.S real estate market booming and the average sales price of houses sold to be in a strong uptrend — what could threaten the health of the housing market?
With the current sales price for houses, the fears of a bubble and rising interest rates will make mortgages more expensive — a possible economic slowdown in the growth of the U.S economy.
But if I had to choose a specific factor that did not work for Zillow and Opendoor — it would be to focus on the price forecasting volatility and the AI data.
I will end this article with a quote by Steve Jobs, “I’m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance.”
For now, Opendoor needs to grab this opportunity and deliver positive financial results when Zillow quits leasing houses.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.