Opendoor Technologies Inc. (OPEN, Financial) is a leading digital platform for residential real estate. Founded in 2014, the company claims to have rebuilt the entire consumer real estate experience and has made buying and selling possible on a mobile device.
The company streamlines the process of buying and selling a home into a seamless digital experience that is simple, certain and fast. Sellers can go to Opendoor.com, receive an offer and sign and choose their closing date. Buyers can download the Opendoor app, tour and visit both Opendoor and nonOpendoor homes and make an offer with just a mobile device. Homebuyers and sellers can also integrate the company’s current suite of adjacent services, such as title and escrow and Opendoor Home Loans, to complete their transaction.
The company believes residential real estate may be the largest undisrupted category in the U.S. In 2021, more than six million existing homes were sold, representing nearly $2.3 trillion in transactions. Additionally, with approximately two-thirds of Americans living in a home they own, housing is the single-largest consumer expenditure in the country, ahead of transportation, food, insurance and health care.
Opendoor currently operates in a growing number of cities and neighborhoods across the U.S.
Headquartered in San Francisco, the company went public in December 2020 through a special purpose acquisition company transaction. The stock has declined 66% from its 52-week high and currently has a $5.3 billion market cap.
SPAC transaction
Opendoor became public through a SPAC associated with failed SPAC entrepreneur Chamath Palihapitiya. His SPAC, Social Capital Hedosophia II, acquired the company and paid $414 million in the merger. Opendoor also received an additional $600 million from a private investment in public equity offering, giving the real estate company a combined $1 billion in capital and bringing its valuation to $4.8 billion. It closed on its first day of trading at $31.25 and has declined approximately 80% since then.
Financial review
2021 was a strong growth year for Opendoor, particularly considering easy comparables against 2020, which was plagued by Covid-19 issues. In an annual filing with the SEC, the company noted total revenue increased 211% to $8 billion and total homes sold was 21,725, which was an increase of 119%. Gross profit was $730 million, up 232% versus 2020, and the gross margin came in at 9.1% versus 8.5% in 2020.
The company reported net losses on both a non-GAAP and GAAP basis. The net loss was $662 million, but the company reported stock compensation expense of $536 mllion. The adjusted net loss was $116 million. The company was Ebitda negative for the year.
The company purchased $5.6 billion in real estate inventory during 2021 and total inventory of homes on the balance sheet at year-end was $6.1 billion. Most of this was refinanced with non-recourse debt, meaning the company is not on the hook for the debt and is instead backed by the homes themselves. Non-recourse debt is also $6.1 billion, of which $4.2 billion is considered current.
The company ended the year with $2.2 billion in cash, cash equivalents and marketable securities. Based on its current borrowing capacity, the company believes it can fund up to approximately $10 billion in new home inventory going forward.
Valuation
The company indicated real Ebitda is a ways off and GAAP profitability even further. As such, it is best to value Opendoor on a price-book basis similar to most financial service or real estate companies. Total shareholders' equity at year-end was $2.25 billion, which is a book value per share of approximately $3.62. The stock is currently trading at approximately 1.9 times book value.
Zillow Group Inc. (Z, Financial) is not a good comparable because it is no longer in the home-flipping business. The average residential real estate company currently trades at about 1.3 times book value.
Guru trades
Gurus who have recently purchased Opendoor stock include Frank Sands (Trades, Portfolio) and Steven Cohen (Trades, Portfolio). Gurus who have recently reduced or sold out of their positions include Catherine Wood (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).
Conclusion
The current trading levels of Opendoor shares do not seem to be accounting for major risks to the company as the business model has not been tested through a severe real estate market downturn. Buying the stock below book value of $3.62 would create a margin of safety and account for potential large losses in its real estate portfolio and non-property income sources.
The competition level is high in the home buying and selling industry. There are other online players competing in the same space and real estate agents are still generally preferred by most people due to the integral nature of personal touch service in a consumer's largest family purchase.
In addition, 30-year mortgage rates have gone from below 3% to over 5% recently and the effects on the residential real estate market is unknown at this time.
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