I am neutral on Opendoor (OPEN) as it has very strong growth potential, general Wall Street analyst bullishness, and a competitive positioning within its industry. On the other hand, it trades at a massive valuation multiple and could be hurt by rising interest rates.
Headquartered in San Francisco, Opendoor opened its doors in 2014. Its founders are Keith Rabois, Ian Wong, Eric Wu (CEO), and Justin Ross. With eyes set on dominating the market, the company began buying several houses in Phoenix, USA. By 2016, Opendoor was already responsible for approximately 2% of all purchases in the Phoenix region.
Strengths
Opendoor’s business model is based on the idea of buying up houses and then selling them at a profit. The company also makes money by charging the home seller a sales fee and charging interest on mortgage loans. Even though the pandemic affected companies like Opendoor, Carvana (CVNA), and Airbnb (ABNB), the negative effects did not last.
Through its IPO in December 2020, the company bagged 1.4 billion dollars, which management used to go on the offense. By May of 2021 alone, it had added six new markets, and in June, it reached 100,000 total transactions. Today, Opendoor benefits from 40 different locations spread out across the United States, with a customer base as large as 100,000 people.
Recent Results
In the quarter that ended in November 2021, OPEN reported revenue of $2.3 billion with -$56.8 million earnings. In the second quarter of 2021, the company reported revenues of $1.9 billion with earnings of -$143.81 million, during which time EPS also improved from -$0.24 to -$0.09. Its EBIDTA also grew to $35 million from $26 million, while its contribution margin stood at 7.5% versus 10.8% in the second quarter of 2021.
Moreover, OpenDoor reported it had sold 5,988 homes in the third quarter of 2021, which is an improvement from 3,481 homes in the second quarter. This also increased its inventory balance by 130%.
Valuation Metrics
OPEN stock is very difficult to value, as it is rapidly growing and currently has a highly elevated valuation. Its enterprise value to EBITDA ratio is sky-high, at 205.32 times. However, in 2021 EBITDA is expected to grow by 170.1% while revenue is expected to grow by 184.2%.
Meanwhile, in 2022 revenues expected to more than double again. As a result, if the company can continue to scale rapidly, it could potentially offer investors a compelling value.
Wall Street’s Take
According to Wall Street analysts, OPEN earns a Moderate Buy analyst consensus based on 3 Buy ratings, 2 Hold Ratings and 0 Sell ratings in the past three months. Additionally, the average price target of $29.75 puts the upside potential at 97.41%.
Summary and Conclusions
OPEN stock is rapidly growing and, with the recent departure of Zillow from the house-flipping industry, it should enjoy even further headway with less competition in this space.
That said, the stock looks very expensive here as its valuation multiple is extremely high. On the other hand, the average price target from Wall Street analysts implies the stock could see enormous upside over the next year. As a result, investors should keep in mind that the stock is highly speculative, and its future outlook is very uncertain.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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