Social Capital Hedosophia II a Great Play on a Booming Housing Market

The boom in SPAC (special purpose acquisition company) mergers continues. Even with that boom, there may not be a better SPAC to own than Social Capital Hedosophia Holdings II (NYSE:IPOB) stock.

An illustration of a house with a "for sale" sign pops out of a smartphone.
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SCHH II is merging with Opendoor, a unique and innovative real estate company. On its own, the case for what will be Opendoor stock looks attractive. The U.S. real estate market is ripe for disruption, which creates a massive opportunity for Opendoor’s digital platform.

But that’s not the only good news. That same housing market is benefiting from several tailwinds at the moment, largely as a result of the novel coronavirus pandemic.

The combination of a large and growing market plus the opportunity for disruption has underpinned most of the market’s biggest winners in recent years. It could do the same for Opendoor — and IPOB stock is the way to get in early.

Opendoor’s Opportunity

Technology has made so many things cheaper and easier. But real estate has been surprisingly resistant.

Opendoor aims to change that. Home sellers can get an instant quote and get paid “in a matter of days,” as Opendoor’s website terms it. Longer listings include a $10,000 interest-free advance for home renovations.

Opendoor works with buyers as well. That includes offering virtual home tours, an obvious benefit amid the lingering effects of the pandemic.

The company offers all these attributes and a lower price. Listing fees are 5%, a full point lower than the traditional 6%.

One percentage point doesn’t sound like much of a difference. But, of course, 1% of the average home sale price is a lot of money. Based on current figures, it’s roughly $3,700. And that figure is a far larger portion of the cash most sellers are receiving after their mortgage is paid off.

This is a company that can revolutionize U.S. real estate — and that’s a huge market. It’s a market that’s easily big enough to allow Opendoor to grow into the current valuation implied by IPOB stock.

Strong Performance So Far and More Growth on the Way

Opendoor’s platform already has driven enormously impressive growth. In 2017, revenue was about $700 million. Last year, the figure reached $4.7 billion.

That growth isn’t going to stop any time soon. Opendoor is in just 21 markets at the moment; it has plans to get that figure to 100. Notably, the company has zero presence in the Northeast, which has among the highest home prices (and thus the most potential revenue) in the country.

Meanwhile, U.S. real estate is a $1.6 trillion market, according to the company’s investor presentation. 2019 revenue suggests that Opendoor had just 0.3% of the market. Opendoor believes that its current plan can get revenue to $50 billion, which still would represent only about 3% market share.

And as revenue growth continues, profits will increase at a faster rate. More sales and data will improve pricing accuracy, helping margins. “Economies of scale” will add another boost, as costs are spread out among a larger revenue base.

On a consolidated basis, Opendoor isn’t yet profitable. But it shouldn’t be: the company is investing in growth. Corporate costs, for now, are outpacing the profit the company makes off individual properties. As long as Opendoor keeps growing, that will change.

No, IPOB Stock Isn’t Cheap

Admittedly, some investors have figured out how attractive this story is. IPOB stock has more than doubled since late August, with most of the gains coming after the Opendoor merger was announced in mid-September. (Social Capital Hedosophia II contributes little to the merger beyond already-raised cash. Chief executive officer and well-known venture capitalist Chamath Palihapitiya likely will contribute his knowledge and expertise post-merger.)

After the rally, valuation admittedly looks steep. After the merger, about 631 million shares should be outstanding (again, according to the merger presentation). That suggests a pro forma market capitalization around $15 billion.

But I’d keep two things in mind. First, a $15 billion market capitalization doesn’t seem that onerous against a revenue target more than three times as high.

Second, valuation hasn’t been a good reason to sell true disruptors. And it shouldn’t be. When the market is large enough, investors rightly take the long view. U.S. real estate clearly is a large enough market. And Opendoor clearly is the primary disruptor. It sold more than four times as many houses in 2019 as its closest competitor.

Even with IPOB stock up more than 130%, the opportunity here isn’t priced in. That’s not because investors aren’t paying attention. It’s because that opportunity is so massive that it will take time to properly appreciate.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.

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