Opendoor Technologies (OPEN), the leading digital platform for residential real estate, has been snowballing over the past few quarters with its digital, on-demand experience transforming what is considered for many a life’s most significant transaction: Buying and/or selling a home.
With the COVID-19 pandemic increasing the value of residential real estate powered by the working-from-home/remote lifestyle, demand for frictionless and hustle-free has skyrocketed. This is reflected in the company’s results over the past few quarters, which have grown exponentially sequentially. I have previously explained how Opendoor makes money and how to value the company in this article.
In my view, with any time of purchase, including real estate, continually shifting online, industry-disruptor Opendoor is set to benefit substantially going forward. For this reason, I am bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
Q3 Results: A Fantastic Quarter
Investors were rather worried as Opendoor’s Q3 results approached, likely rattled by Zillow’s (Z) iBuying failure, forcing the company to mass-sell its recently purchased properties.
In the case of Opendoor, the company did not only not slow its operations but impressively, the company’s home purchases and growth accelerated compared to the previous quarter.
The company purchased 15,181 houses in Q3 2021, 79% more compared to Q2 2021. Revenue came in at $2.3 billion, up 91% sequentially, with 5,988 total homes sold, up 72% versus Q2 2021.
Many investors have challenged the company’s low-margin business model, which diminishes the excitement around sales growth. However, the company only needs to achieve a contribution margin in the single digits to still appear cheap at the stock’s current levels.
Contribution margin, one of Opendoor’s most essential measures of unit economics, was 7.5% during Q3, recording the 19th consecutive quarter of positive contribution margin on house sales.
Management mentioned that it expects the normalization of Opendoor’s resale mix as inventory is no longer over-indexed to recently acquired homes, and the company’s improved underwriting accuracy relative to home price appreciation should persist through Q4 2021.
This should lead to a further moderation in the contribution margin, which should be reasonably sustained at 4% to 6% on an annual basis, driven by Opendoor’s cost structure and the strength of its pricing and operational capabilities.
Has the Stock Gotten Cheap?
With Opendoor’s commissions in the single digits and the fact that even when the company resells a home at a higher price, the marginal gain will hardly ever exceed the double digits, it is relatively not meaningful to value the business based on its P/S multiple. It works on most hyper-growth tech companies but not on Opendoor.
I am considering an average scenario that includes Opendoor’s gross margins holding to around 7% in the long run. Assuming sales reach around $15 billion next year as analysts predict, gross margins could reach around $1.1 billion.
If we assign a 15x multiple on that, we come out with a rough “fair value” estimate of $16.5 billion. The company currently features a market cap of around $8.9 billion, which could potentially indicate a strong upside ahead.
Still, note that valuing Opendoor can be quite tricky during its early stages as a company.
Wall Street’s Take
Turning to Wall Street, Opendoor Technologies has a Strong Buy consensus rating, based on five Buys, two Holds, and zero Sells assigned in the past three months. At $31.80, the average Opendoor price target implies 118.6% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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