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Opendoor Technologies: Real Estate Disruptor with Upside Ahead
Stock Analysis & Ideas

Opendoor Technologies: Real Estate Disruptor with Upside Ahead

Opendoor Technologies (OPEN) is a leading digital platform for residential real estate.

In 2014, the company launched Opendoor to reinvent one of life’s most significant transactions with a new, entirely simple way to buy and sell a home.

The company believes its digital, on-demand experience will be the future of how people buy or sell a home.

Yet, in a world with purchases increasingly migrating online, the real estate transaction has largely remained unchanged.

Hence, Opendoor’s total addressable market is virtually limitless. I am bullish on the stock. (See Analysts’ Top Stocks on TipRanks)

How Does Opendoor Make Money

If you have ever sold or bought a home, in a traditional home sale (with most home sales nowadays still taking place offline), the seller reaches for the services of a real estate agency whose representatives place the home into multiple listing services, featuring photos or virtual tours of the asset, with the goal of scheduling in-person viewings for potential buyers.

In addition, agents give market advice and help the seller market the home and close the sale. Upon competition of the home sale, the agent earns a commission that can go up to 6% (depending on many factors) of the purchase price. The commission is then divided by the agency and the agent.

Opendoor is disrupting this old model by purchasing the home from the seller without a middleman.

The property owner can sell their home by going online, and getting an algorithm-generated cash offer based on over 100 home and neighborhood data points contributed by the seller, as well as from publicly available information.

Once the offer has been made, Opendoor evaluates the property to confirm the information provided by the seller. Once this goes through, the seller can arrange a closing date in as quickly as three days.

In exchange for granting the seller convenience and certainty concerning the price and closing date, the company usually charges a fee between 5% to 8% of the home’s agreed-to purchase price.

Once Opendoor is left with the property in its hands, it aims to repair or upgrade it, and resell it by listing it for sale on its website.

Opendoor can then generate additional profits by selling the home at a higher price than its net purchasing cost. The company has been trading homes at purchase prices between $100,000 and $750,000.

Lately, it has been expanding its reach, making offers as high as nearly $1.6 million.

How to Value the Stock

While Opendoor has been growing at an insane pace, with its latest results posing revenue growth of 59% sequentially, its business model is susceptible to razor-thin margins.

The commission fees are in the single digits, and even when the company resells a home at a higher price, the margin there will also hardly exceed the double digits.

For this reason, unlike other tech companies, valuing Opendoor based on its P/S multiple is not meaningful.

An average scenario includes Opendoor’s gross margins sticking to around 7% in the long run. Assuming sales reach around $15 billion at the company’s current run rate, gross margins could reach around $1.1 billion, to which assigning a 15x multiple should seem quite fair.

In that regard, Opendoor could be rather undervalued at its current levels. Still, there are risks involved in the stock’s investment case. A bearish real estate market could inflict heavy damages on Opendoor’s financials.

Wall Street’s Take

Turning to Wall Street, Opendoor Technologies has a Strong Buy consensus rating, based on four Buys, one Hold, and zero Sells assigned in the past three months. At $31.67, the average Opendoor price target implies 32.8% 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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