Editor’s note: “Opendoor: The ‘Amazon of Houses’ Keeps Getting Better” was previously published in February 2023. It has since been updated to include the most relevant information available.
For those who are unfamiliar, Opendoor (OPEN) is the world’s largest iBuyer. The company uses technology and data science to buy homes from sellers virtually. It then turns around and uses that same approach to sell those homes to prospective buyers.
We love this business model. We think it’s genius. It dramatically improves the archaic, universally-hated home-buying model. Specifically, Opendoor makes the home-shopping experience:
- Cheaper – it axes profit-taking middlemen (real estate agents) and replaces their often-flexible 6% commission with a 5% flat transaction fee.
- Faster – Opendoor’s advanced data science methods accurately price a home in minutes. And sellers can close a sale in as few as three days.
- Easier – Opendoor allows folks to literally sell their home from their mobile phone with just a few clicks.
- Simpler – Opendoor simplifies home-selling into a unified process between just the seller and Opendoor. Say goodbye to disjointed and complicated sales between multiple parties.
- More convenient – Opendoor allows sellers to choose their closing dates and escrow periods, enabling the flexibility to move on their own time.
- More reliable – Opendoor’s offers are all-cash. And its transactions never fall through because it “fails to qualify” – something that happens quite often in the home-selling process.
From a consumer advantage perspective, Opendoor is creating a superior way to buy and sell homes. It’s the future of home shopping. By 2030, we believe a large majority will use Opendoor to buy and sell homes. It’ll be much the same way shoppers today use Amazon (AMZN) to buy goods instead of going into Walmart (WMT) or Target (TGT).
To that end, we see Opendoor as an early stage “Amazon of Houses.”
Don’t Worry About Profitability
For those concerned about profits, worry not.
After a few quarters of underperforming in a down market, the company just reported first-quarter numbers that topped expectations across the board. But the real story here is Opendoor’s improving profitability trends as it phases out its “old cohort” of homes that it bought before the housing market reset in mid-2022.
That old portfolio is extremely unprofitable because Opendoor bought high and is now forced to sell low (-13.2% contribution margin). Opendoor has now sold through about 92% of that old cohort, and more and more of its business today is coming from a new portfolio that is actually extremely profitable (8.5% contribution margins). In other words, Opendoor’s business is structurally shifting from low-margin to high-margin inventory right now.
As a result, overall profit margins are dramatically improving, and EBITDA losses are rapidly shrinking. EBITDA loss shrunk from $350 million last quarter to $340 million this quarter, and they are expected to further decrease to less than $200 million next quarter. We expect this trend to persist for the foreseeable future and for Opendoor to return to profitability by late 2023 or early 2024.
We believe that this improving profitability trajectory, coupled with a rebound in the housing market on the back of lower mortgage rates, will lead to a tremendous recovery in OPEN stock in 2023.
At scale, the company should be able to net gross margins north of 10% – driven by a mix of the commission fee and housing price appreciation. That’s very similar to what Amazon’s retail business nets on its gross margins. Economies of scale have enabled Amazon’s retail business to become very profitable. Similarly, economies of scale will enable Opendoor to be very profitable one day, too.
The Final Word
We believe this quarter is the beginning of Opendoor proving the resiliency of its business model to Wall Street. Once Wall Street is fully convinced – maybe within another few quarters as operational metrics improve – this stock will fly higher.
We’re pounding the table on this stock as a multi-bagger with 10X potential.
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On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.