A brief dalliance in the meme stock world caused shares of Offerpad (OPAD) to more than double from under $9 to $20 in a matter of days in September.
Unfortunately for momentum investors who bought in during this spike, shares have since given back all of those gains and more. I’m bullish on Offerpad after the sell-off, as the stock is de-risked at this lower valuation.
Offerpad is an interesting business in its own right, and it now looks attractively valued for a company with good growth prospects. (See Offerpad stock charts on TipRanks)
Business Description
Offerpad went public via a business combination with Supernova Acquisition Partners in September. Supernova’s leadership included Spencer Rascoff, a founder and former CEO of Zillow (ZG).
Offerpad’s core business is buying and selling residential real estate as an “iBuyer” via its Express offering. iBuyers are essentially online real estate platforms where homeowners can sell their home directly to the company in lieu of enduring the traditional home selling process.
Investors may be familiar with other iBuyers like Opendoor (OPEN), or some of the bigger online real estate players like Redfin (RDFN) and Zillow which are also growing their own iBuying businesses.
Offerpad views the residential real estate market as a $1.9-trillion opportunity, and estimates that only about 1% of current transactions are done digitally.
Appeal to Home Sellers
There are several key benefits of selling a home to an iBuyer. Sellers can receive a cash offer within 24 hours after spending just a few minutes filling out an online form, as opposed to hiring an agent and waiting to receive offers from prospective buyers.
Sellers don’t have to stage their homes for open houses, or inconvenience themselves with repeated showings. According to Offerpad, sellers can close in as little as three days as opposed to the typical 30-45 days in escrow the typical closing takes.
Furthermore, sellers don’t have to make repairs or concessions based on an inspection, as Offerpad makes these types of repairs itself in the interest of boosting its margins when selling these properties.
All of these advantages mean less points of friction for the seller. The downside for sellers is that they will receive a lower offer price from Offerpad than from a traditional buyer, but for a subset of sellers this convenience can be worth it. Offerpad then sells these homes to both individual homeowners, and to institutional investors.
It is worth mentioning that Offerpad boasts an admirable net promoter score of 81, and according to the company, nine out of 10 sellers surveyed would recommend Offerpad to a friend.
Opportunities
As Offerpad expands its footprint, it has the opportunity to enter into the many ancillary businesses that surround the homebuying process.
For example, the company has already moved into mortgages and titles, which makes a lot of sense. In the medium term, the company plans to expand into home warranties, remodeling services, and home insurance.
Further out, the company aims to get into energy efficiency, and the smart home business. Offerpad should be able to create synergies with its current core business, and it doesn’t have to reinvent the wheel to leverage its current strengths in these new businesses.
If Offerpad can successfully enter these new verticals , it would create a flywheel effect for the company, and give it plenty of cross-selling opportunities, making it a one-stop shop for buying and selling homes.
The company is also working to expand geographically. Offerpad currently operates in approximately 1,000 cities across 17 metropolitan markets, mainly concentrated in the sun belt.
Valuation
Offerpad’s current market cap after the sell-off is $1.8 billion, meaning that the company is trading at around 1.7x sales. According to Offerpad, the median digital real estate platform trades at a 3.9 price-to-sales ratio.
The company is now trading for less than its projected 2022 revenue, and far below its 2023 estimate of $3.9 billion in revenue. For a company growing its revenue at a 92% CAGR over the past five years, this is a very undemanding valuation.
Offerpad is rated Hold by the analyst community. The lone analyst covering OPAD has a Hold rating, although their $11 price target implies 44.4% upside potential.
Risks
A key risk to Offerpad would be increased competition from deep-pocketed players like Redfin and Zillow. Opendoor is another competitor, and one that just substantially increased its borrowing power to go out and acquire houses.
While an overall economic downturn or a downturn in the housing market would theoretically be a risk for Offerpad, it’s also feasible that this would be an opportunity for the company as it would create more turnover and more sellers would potentially be in need of its Express services.
Takeaway
Shares of Offerpad have been extremely volatile over the past month, so investing in this company may not be for the faint of heart.
However, at current levels, a lot of risk already appears to be priced in. This presents a rare opportunity to invest in a disruptive, high-growth business at a bargain-bin valuation.
Disclosure: At the time of publication, Michael Byrne owned shares of Offerpad.
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