Opendoor Technologies (OPEN) has become one of the leading digital platforms for residential real estate transactions by offering a digital, on-demand experience. After all, many consider buying or selling a home a lifetime’s most important transaction.
The pandemic increased the value of residential real estate, driven by the shift towards the working-from-home/remote lifestyle. With a record number of individuals showing record demand for a frictionless and hustle-free transaction process, Opendoor’s revenues have been skyrocketing over the past few quarters.
Opendoor is revolutionizing the old model of having a real estate agency whose representatives place the home into several listing services by buying the home from the seller directly, without the middleman.
The owner of the property can sell their asset by going online and receiving an algorithm-generated cash offer based on over 100 home and area data points contributed by the seller and publicly obtainable information. Here’s the great part: once Opendoor has made the offer, the company assesses the property to verify the information supplied by the seller is correct, and then the seller can set a closing date in as quickly as three days.
In my view, this is definitely the future of buying/selling a home. With the majority of transactions still occurring offline, including both parties paying elevated fees to close a transaction, Opendoor is well-positioned to benefit significantly going forward. For this reason, I am bullish on the stock.
Growing Financials
Opendoor’s growth did not only not slow down following the pandemic boost it enjoyed last year, but impressively, its home purchases and growth accelerated versus the same period last year.
During its latest Q3 results, Opendoor bought 15,181 houses, 79% more compared to the previous quarter. Revenues reached $2.3 billion, up 91% quarter-over-quarter, with 5,988 total homes sold, an increase of 72% sequentially.
Some investors are concerned regarding the company’s low-margin business model, which softens the excitement around sales growth. That said, for the company to be cheap at its current levels, it only needs to accomplish a contribution margin in the single digits.
Opendoor’s contribution margin is one of the company’s most critical measures of unit economics. It was 7.5% during the last quarter, registering the 19th consecutive three-month period of positive contribution margin on house sales.
Management noted that the company expects the normalization of Opendoor’s resale mix as inventory levels are no longer over-indexed to recently bought homes. Still, Opendoor’s enhanced underwriting accuracy comparable to home price growth should be sustained in the company’s upcoming earnings.
Logically, this should result in additional temperance in the contribution margin, which should be sustained at around 4% to 6% on an annual basis. This is to be powered by Opendoor’s cost structure and the potency of its pricing and operating capabilities. Sellers should still be willing to pay a premium/receive a discount offer for the convenience Opendoor provides.
Wall Street’s Take
Turning to Wall Street, Opendoor Technologies has a Moderate Buy consensus rating, based on three Buys, two Holds, and one Sell assigned in the past three months. At $23.40, the average Opendoor Technologies price target implies 176.3% upside potential.
Conclusion
Opendoor Technologies is a disruptive company in a growing market. Despite its low-margin business, at a price/sales ratio of 0.72 based on this year’s expected sales, I find the stock rather attractively priced.
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